UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number: 000-50563

Bakers Footwear Group, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code:

(314) 621-0699

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Common Stock, par value $0.0001 per share

Name of each exchange on which registered:

Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

There is no non-voting common equity. The aggregate market value of the common stock held by nonaffiliates (based upon the closing price of $0.79 for the shares on the Nasdaq Global Market) was approximately $2,203,000, as of August 1, 2009. For this purpose, shares of the registrant’s common stock known to the registrant to be held by its executive officers, directors, certain immediate family members of the registrant’s executive officers and directors and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is required by Form 10-K and shall not be deemed to constitute an admission that any such person is an affiliate and is not necessarily conclusive for other purposes.

 

As of April 24, 2010 there were 7,384,056 shares of the registrant’s common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement for the Registrant’s 2010 Annual Meeting of Shareholders to be filed within 120 days of the end of the Registrant’s 2009 fiscal year (the “2010 Proxy Statement”) are incorporated by reference in Part III.

 

 

TABLE OF CONTENTS

 

 

 

 

General

 

We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We sell both private label and national brand dress, casual and sport shoes, boots, sandals and accessories. We strive to create a fun, exciting and fashion oriented customer experience through an attractive store environment and an enthusiastic, well-trained sales force. Our buying teams constantly modify our product offerings to reflect widely accepted fashion trends. We strive to be the store of choice for young women between the ages of 16 and 35 who seek quality, fashionable footwear at an affordable price. We provide a high energy, fun shopping experience and attentive, personal service primarily in highly visible fashion mall locations. Our goal is to position Bakers as the fashion footwear merchandise authority for young women.

 

As of January 30, 2010, we operated a total of 238 stores, including 19 stores in the Wild Pair format. The Bakers stores target young women between the ages of 16 and 35. We believe this target customer is in a growing demographic segment, is extremely appearance conscious and spends a high percentage of disposable income on footwear, accessories and apparel. The Wild Pair chain offers edgier, faster fashion-forward footwear that reflects the attitude and lifestyles of both women and men between the ages of 17 and 29. As a result of carrying a greater proportion of national brands, Wild Pair has somewhat higher average prices than our Bakers stores. As of April 24, 2010, we operated 239 stores, including 19 Wild Pair stores.

 

Our fiscal year is the standard retail calendar, which closes on the Saturday closest to January 31. In this Annual Report on Form 10-K, we refer to the fiscal years ended January 28, 2006, February 3, 2007, February 2, 2008, January 31, 2009, and January 30, 2010 as “fiscal year 2005,” “fiscal year 2006,” “fiscal year 2007,” “fiscal year 2008,” and “fiscal year 2009” respectively. For more information, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Fiscal Year,” appearing elsewhere herein. When this report uses the words “Company,” “we,” “us” or “our,” these words refer to Bakers Footwear Group, Inc., unless the context otherwise requires.

 

Recent Developments

 

We incurred net losses of $9.1 million and $15.0 million in fiscal years 2009 and 2008, but made significant progress during 2009 and 2008 in refocusing our inventory lines and maintaining cost control. We achieved increases in comparable store sales of 1.3% and 0.5% in fiscal years 2009 and 2008, respectively. In fiscal year 2009 we increased gross margin by 127 basis points and reduced selling, general and administrative expenses by 171 basis points as a percentage of sales on top of a 200 basis point increase in gross margin and a 200 basis point reduction in selling, general and administrative expenses achieved in fiscal year 2008. These improvements were made despite being negatively impacted by the sharp economic slowdown beginning in fall 2008.

 

Our losses in the last three years have had a significant negative impact on our financial position and liquidity. As of January 30, 2010, we had negative working capital of $14.3 million, unused borrowing capacity under our revolving credit facility of $1.9 million, and our shareholders’ equity had declined to $2.1 million.

 

Our business plan for fiscal year 2010 is based on mid-single digit increases in comparable store sales for the remainder of the year, although comparable store sales through April 24, 2010 are down 1.4%. Based on our business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2010. The business plan reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2009. The plan also includes continued control over selling, general and administrative expenses. We continue to work with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2010 reflects continued improvement in cash flow, but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in our business plan.

In fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan due February 1, 2011. As of April 24, 2010 the balance on our term loan was $2.2 million, with monthly principal and interest payments due through February 1, 2011. Originally, the term loan agreement contained financial covenants requiring us to maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) measured each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009 and March 2010) to modify these covenants in order to remain in compliance. The March 2010 amendment completely eliminated these covenants for the remainder of the term loan. As consideration for the initial loan and the May 2008 amendment thereto, we issued 400,000 shares of our common stock and paid an advisory fee of $300,000 and costs and expenses. As consideration for the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an additional 250,000 shares of our common stock. We did not pay any fees in connection with the March 2010 amendment.

 

In order to obtain our senior lender’s consent to the April 2009 and September 2009 amendments to our subordinated secured term loan, we amended our credit facility in those months. Among other things, the amendments extended the maturity from August 31, 2010 to January 31, 2011, reduced the credit ceiling from $40 million to $30 million, generally increased the interest rate from the bank’s prime rate to the prime rate plus 3.5%, eliminated a grace period for failing to maintain a minimum availability and implemented other amendments to the agreement, including increasing certain fees. As additional consideration for the amendments and the extension of the maturity date of the facility, we paid a total of $155,000 in fees. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of April 24, 2010, the balance on our revolving line of credit was $14.3 million and our unused borrowing capacity was $2.0 million.

 

Our business plan is premised on our ability to renew or replace our existing credit facility which is scheduled to expire on January 31, 2011 at terms comparable to the existing terms. Although we believe that we will be successful in this effort, there is no assurance that we will be able to do so. If we are unable to extend our credit facility, it would become necessary for us to obtain additional sources of liquidity to continue to operate.

 

We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. In recognition of existing liquidity constraints, we continue to look for additional sources of capital at acceptable terms. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See “Item 1. Business — Risk Factors — “If we cannot maintain generally positive sales trends, we could fail to maintain a liquidity position adequate to support our ongoing operations.” herein.

 

For additional information on our loan arrangements, please see “— Liquidity and Capital Resources” herein and “Item 1. Business — Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 1. Business — Risk Factors — Our credit facility restricts our activities” herein.

 

As a result of our reduced shareholders’ equity, in September 2009 we transferred the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market, the lowest tier of The Nasdaq Stock Market (“Nasdaq”). On March 29, 2009, Nasdaq issued a determination to de-list our common stock as a result of our failing to meet the $2.5 million minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. We are currently in the process of appealing Nasdaq’s determination, which has temporarily stayed our de-listing from Nasdaq. However, we believe that it is likely that our operating results will not allow us to regain compliance with the Nasdaq minimum stockholders’ equity requirement during fiscal year 2010. Therefore, we can give no assurance that our appeal will be successful. Please see “Item 1. Business — Risk Factors — The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq could negatively impact the value of our common stock and decrease the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock.”

 

Our independent registered public accounting firm’s report issued in this Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our

ability to continue as a going concern, including our recent losses and working capital deficiency. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2009 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” herein.

 

Company History

 

We were founded in 1926 as Weiss-Kraemer, Inc., later renamed Weiss and Neuman Shoe Co., a regional chain of footwear stores. In 1997, we were acquired principally by our current chief executive officer, Peter Edison, who had previously served in various senior management positions at Edison Brothers Stores, Inc. In June 1999, we purchased selected assets of the Bakers and Wild Pair chains, including approximately 200 store locations and inventory from Edison Brothers, which had previously filed for bankruptcy protection. We retained the majority of Bakers’ employees and key senior management and closed or re-merchandised our stores into the Bakers or Wild Pair formats. In February 2001, we changed our name to Bakers Footwear Group, Inc. In February 2004, we raised $15.5 million in connection with our initial public offering, reclassified our capital structure, converted outstanding subordinated convertible debentures into shares of common stock and terminated our repurchase obligations relating to our pre-IPO shares. We used the net proceeds to repay certain outstanding obligations and open new stores and remodel existing stores. In April 2005, we completed a private placement of 1,000,000 shares of common stock and warrants to purchase a total of up to 375,000 shares of common stock. In June 2007, we completed a private placement of $4.0 million in aggregate principal amount of subordinated convertible debentures. In February 2008, we obtained net proceeds of approximately $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan and the issuance of 350,000 shares of our common stock. For additional information regarding these transactions, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

We operate as one business segment for accounting purposes. See “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” for information regarding our revenues, assets and other financial information. We are incorporated under the laws of the State of Missouri. Our executive offices are located at 2815 Scott Avenue, St. Louis, Missouri 63103 and our telephone number is (314) 621-0699. Information on the retail website for our Bakers stores, www.bakersshoes.com, is not part of this Annual Report on Form 10-K.

 

Improving Comparable Store Sales

 

We strive to improve our comparable stores sales by focusing on our micro-merchandising strategy and focusing on better selling styles. We also expect to complement our in-store sales with Internet sales.

 

 

 

New Store Strategy

 

We have delayed most of our store expansion plans until our liquidity improves. We are also subject to limitations under our debt agreements on the amount we can spend on capital expenditures through fiscal year 2010. Over the long-term, we believe that there are substantial opportunities of us to grow our business.

 

We opened four stores in fiscal year 2009 and have opened two new stores in fiscal year 2010. Further store openings in fiscal year 2010 are constrained by our debt covenant for capital expenditures. In selecting specific sites, we look for high traffic locations primarily in regional shopping malls. We evaluate proposed sites based on the traffic patterns, type and quality of other tenants, average sales per square foot achieved by neighboring stores, lease terms and other factors considered important with respect to a specific location. We constantly update our search for new locations and have identified 200 additional locations for potential new stores. We opened two new stores in fiscal year 2008 and six new stores in fiscal year 2007.

 

Construction costs for new stores currently average approximately $360,000. In connection with opening a new store, we typically receive a construction allowance from the landlord, which can range from $25,000 to over $100,000.

 

Product Development and Merchandising

 

Our merchants analyze, interpret and translate current and emerging lifestyle trends into footwear and accessories for our customers. Our merchants and senior management use various methods to monitor changes in culture and fashion. Our buyers travel to major domestic and international markets, such as New York, London and Milan, to gain an understanding of fashion trends. We attend major footwear trade shows and analyze various information services which provide broad themes on the direction of fashion and color for upcoming seasons. We also monitor current music, television, movie and magazine themes as they relate to clothing and footwear styles.

 

A crucial element of our product development is our test and react strategy. We typically buy small quantities of new footwear and deliver merchandise to a cross-section of stores. We monitor sell-through rates on test merchandise and, if the tests are successful, quickly re-order product to be distributed to a larger base of stores. Frequently, we can make initial determinations as to the results of a product test. Our senior management team has extensive experience in retail and in responding to changes in our business.

 

In addition to our test and react strategy, we also attempt to moderate our fashion risk exposure through the national branded component of our merchandise mix. The national brands carried by our stores tend to focus on fashion basic merchandise supported by national advertising by the producer of the brand, which helps generate demand from our target customer. We hope to gain substantial brand affinity by carrying these lines. We believe that a customer who enters our store with the intent of shopping for national branded footwear will also consider the purchase of our lower price, higher gross margin private label merchandise.

 

Product Mix

 

We sell both casual and dress footwear. Casual footwear includes sport shoes, sandals, athletic shoes, outdoor footwear, casual daywear, weekend casual, casual booties and tall-shafted boots. Dress footwear includes career footwear, tailored shoes, dress shoes, special occasion shoes and dress booties.

Private Label.

 

Our private label merchandise, which comprised approximately 85.8% of our net shoe sales in fiscal year 2009, is generally sold under the Bakers label and, in some instances, is supplied to us on an exclusive basis. The retail prices of our private label footwear generally range from $39 to $89 with most offerings in the $59 to $79 range. We are able to offer these prices without sacrificing merchandise quality, creating a high perceived value, promoting multiple sale transactions, and allowing us to build a loyal customer base. Once our management team has arrived at a consensus on fashion themes for the upcoming season, our buyers translate these themes into our merchandise.

 

To produce our private label footwear, we generally begin with a shoe that our buying teams have discovered during their travels or that is brought to us by one of our commissioned buying agents. Working with our agents, we develop a prototype shoe, which we refer to as a sample. We control the process by focusing on key color, fabric and pattern selections, and collaborate with our buying agents to establish production deadlines. Once our buyers have approved the sample, our buying agents arrange for the purchase of necessary materials and contract with factories to manufacture the footwear to our specifications.

 

We establish manufacturing deadlines in order to ensure a consistent flow of inventory into the stores, emphasizing relatively short lead times. Depending upon where the shoes are produced and where the materials are sourced, we can have shoes delivered to our stores in four to 12 weeks. For more information, please see “— Sourcing and Distribution.”

 

Our success depends upon our customers’ perception of new and fresh merchandise. Our test and react strategy reduces our risk on new styles of footwear. We also manage our markdown exposure by re-interpreting our core product. Approximately 10-15% of our private label mix is core product, which we define as styles that carry over for multiple seasons. Our buyers make changes to core products which include colors, fabrications and modified styling to create renewed interest among our customers. We also have relationships with some producers of national brands that, from time to time, produce comparable versions of their branded footwear under our private label brands.

 

Our information systems are designed to identify trends by item, style, color and/or size. In response, our merchandise team generates a key-item report to more carefully monitor and support sales, including reordering additional units of certain items, if available. Merchandising teams and buyers work together to develop new styles to be presented at monthly product review and selection meetings. These new styles incorporate variations on existing styles in an effort to capitalize further on the more popular silhouettes and heel heights or entirely new styles and fabrications that respond to emerging trends or customer preferences.

 

H by Halston.

 

On January 25, 2010, we entered into a licensing agreement with the owner of the Halston trademark. Under the terms of this agreement, we have the exclusive right to manufacture and market footwear and handbags primarily under the trade name “H by Halston” for an initial, renewable term of five years. Our intention is to use H by Halston as a new platform for developing and selling fast, young, moderate priced designer footwear for young women. We believe this agreement can add tremendous value to Bakers with our vendors, employees and customers. It is part of a long-term trend in retailing where retailers own a captive piece of a design label. We expect the first H by Halston shoe to be delivered in May and the first H by Halston line of footwear and handbags to be in our stores by August. We will pay royalties to the owner of the trademark based on the greater of a percentage of sales or a minimum annual royalty of $1,500,000, payable quarterly. The initial quarterly minimum royalty payment was made at the commencement of the agreement; subsequent royalty payments will be made quarterly in arrears.

 

National Brands.

 

Our stores carry nationally recognized branded merchandise which we believe increases the attractiveness of our product offering to our target customers. Our branded shoe sales comprised approximately 14.2% of our net shoe sales for fiscal year 2009. We believe that branded merchandise is important to our customers, adds credibility to our stores and drives customer traffic resulting in increased customer loyalty and sales. Important national brands

in our stores include Ed Hardy^®, Jessica Simpson^®, BCBGirls^®, Guess Sport^®, Rocawear^®, Blowfish^®, Playboy^®, and Baby Phat^®. We believe offering nationally recognized brands are a key element to attracting appearance conscious young women. Branded merchandise sells at a higher price point than our private label merchandise. As a result, despite a lower gross margin percentage, branded merchandise can generate greater gross profits per pair and leverages our operating costs.

 

Accessories.

 

Our branded and private label accessories include handbags, jewelry, sunglasses, ear clips and earrings, leggings, scarves and other items. Our accessory products allow us to offer the convenience of one-stop shopping to our customers, enabling them to complement their seasonal ready-to-wear clothing with color coordinated footwear and accessories. Accessories add to our overall sales and typically generate higher gross margins than our footwear.

 

Merchandise Mix.

 

The following table illustrates net sales by merchandise category as a percentage of our total net sales for fiscal years 2007-2009:

 

 

Planning and Allocation.

 

We have developed a micro-merchandising strategy for each of our Bakers stores through market research and sales experience. We maintain the level and type of styles demanded by subsets of our target customers. We have categorized each of our Bakers stores as being predominantly a mainstream, fashion or urban location, and if appropriate we identify subcategories for certain stores. We have implemented a similar micro-merchandising strategy for our Wild Pair stores.

 

Our micro-merchandising strategy of classifying multiple stores and merchandising them similarly based upon customer demographics and historical sales trends enables our merchants to provide an appropriate merchandise mix in order to meet that particular store’s customers’ casual, weekend/club, career and special occasion needs. In determining the appropriate merchandise mix and inventory levels for a particular store, among other factors, we consider selling history, importance of branded footwear, importance of accessories, importance of aggressive fashion, the stock capacity of the store, sizing trends and color preferences.

 

Our merchandising plan includes sales, inventory and profitability targets for each product classification. This plan is reconciled with our store sales plan, a compilation of individual store sales projections that is developed semi-annually, but reforecasted monthly. We also update the merchandising plan on a monthly basis to reflect current sales and inventory trends. The plan is then distributed throughout the merchandising department, which analyzes trends on a weekly, and sometimes daily, basis. We use the reforecasted merchandising plan to adjust production orders as needed to meet inventory and sales targets. This process helps to control our inventory levels and markdowns but mainly to reallocate inventory acquisitions.

 

Our buyers typically order merchandise 30 to 90 days in advance of anticipated delivery. This strategy allows us to react to both the positive and negative trends and customer preferences identified through our information systems and other tracking procedures. Through this purchasing strategy, we can take advantage of positive trends by quickly replenishing our inventory of popular products. This strategy can also reduce our exposure to risk because we are less likely to be overstocked with less desirable items.

Clearance.

 

We utilize clearance and markdown procedures to reduce our inventory of slower moving styles. Our management monitors pricing and markdowns to facilitate the introduction of new merchandise and to maintain the freshness of our fashion image.

 

We have three clearance sales each year, which coincide with the end of a particular selling season. For more information regarding our selling seasons, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.” You should also refer to “— Seasonality” and to “— Risk Factors — Our overall profitability is highly dependent upon our fourth quarter results.” During a clearance sale, we systemically lower the prices in store of the items, and if not sold, to ship them to one of our 25 stores which have special clearance sections. We believe that our test and react strategy and our monitoring of inventories and consumer buying trends help us to reduce sales at clearance prices.

 

Stores

 

Store Locations and Environment.

 

Our stores are designed to attract customers who are intrigued by a young and contemporary lifestyle and to create an inviting, exciting atmosphere in which it is fun for them to shop in locations where they want to shop. Our stores average approximately 2,300 square feet and are primarily located in regional shopping malls. As of January 30, 2010, six of our stores, which are located in dense urban markets such as New York City and Chicago, have freestanding street locations. We believe that we are also able to operate in a wide range of shopping mall classifications.

 

Our stores create a clean, upscale boutique environment, featuring contemporary finishing and sophisticated details. Glass exteriors allow passersby to see easily into the store from the high visibility, high traffic locations in the malls where we have located most of our stores. The open floor design allows customers to readily view the majority of the merchandise on display while store fixtures allow for the efficient display of accessories.

 

Our customers use cash and third-party credit cards to purchase our products. We do not issue private credit cards or make use of complicated financing arrangements.

Following is a list of our stores by state as of January 30, 2010:

 

 

 

 

Store Concepts.

 

As of January 30, 2010, we operated 219 Bakers stores and 19 Wild Pair stores. As of April 24, 2010, we operated 239 stores including 19 Wild Pair stores. Our Bakers stores focus on widely-accepted, mainstream fashion and provide a fun, high-energy shopping environment geared toward young women between the ages of 16 and 35. Our Wild Pair stores feature fashion-forward merchandise for faster fashion minded women and men with our target customer between the ages of 17 and 29 and reflect the attitude and lifestyle of this demographic niche. The Wild Pair customer demands edgier, faster fashion that exists further towards the “leading edge” than does the typical Bakers customer, which allows us to better monitor the direction of the fashion-forward look that our Bakers customer will be seeking. To match the attitude of our Wild Pair merchandise, we have created a fast, fun, environment within our Wild Pair stores. Wild Pair stores carry a higher proportion of branded merchandise, which generally sells at higher price points than our Bakers footwear.

 

The following table compares our Bakers and Wild Pair formats:

 

 

Store Operations.

 

Our store operations are organized into three divisions, east, midwest/central, and west, which are subdivided into 18 regions. Each region is managed by a regional manager, who is typically responsible for 10 to 18 stores. Each store is typically staffed with a manager, assistant manager and floor supervisor, in addition to approximately five part-time sales associates. In some markets where stores are more closely located, one of the store managers may also act as an area manager for the stores in that area, assisting the regional manager for those stores.

 

Our regional managers are primarily responsible for the operation and results of the stores in their region, including the hiring or promotion of store managers. We develop new store managers by promoting from within and selectively hiring from other retail organizations. Our store managers are primarily responsible for store results, hiring and training store level staff, payroll control, shortage control, store presentation and regional marketing. While managers are key in helping to determine correct product mix for their market, merchandise selections, inventory management and visual merchandising strategies for each store are largely determined at the corporate level and are communicated to the stores generally on a weekly basis.

 

Our commitment to customer satisfaction and service is an integral part of building customer loyalty. We seek to instill enthusiasm and dedication in our store management personnel and sales associates through incentive programs and regular communication with the stores. Sales associates receive commissions on sales with a guaranteed minimum hourly compensation. We run various sales contests to encourage our sales associates to maximize sales volume. Store managers receive base compensation plus incentive compensation based on sales, payroll and inventory control. Regional and area managers receive base compensation plus incentive compensation based on meeting operational benchmarks. Each of our managers controls the payroll hours in conjunction with a weekly budget provided by the regional manager.

 

We have well-established store operating policies and procedures and use an in-store training regimen for all store employees. On a regular basis, our merchandising staff provides the stores with merchandise presentation instructions, which include diagrams and photographs of fixture presentations. In addition, our internal newsletter provides product descriptions, sales histories and other milestone information to sales associates to enable them to gain familiarity with our product offerings and our business. We offer our sales associates a discount on our merchandise to encourage them to wear our merchandise and to reflect our lifestyle image both on and off the selling floor.

Our regional managers are responsible for maintaining a loss prevention program in each of our stores. In addition, we have a loss prevention department with regional loss prevention staff who perform individual store visits throughout the year. Our loss prevention efforts also include monitoring returns, voided transactions, employee sales and deposits, using software to analyze transactions recorded in our point of sale system, as well as educating our store personnel on loss prevention. We track inventory through electronic receipt acknowledgment to better monitor loss prevention factors, which allows us to identify variances and further to reduce our losses due to damage, theft or other reasons.

 

Sourcing and Distribution

 

A key factor in our ability to offer our merchandise at moderate prices and respond quickly to changes in consumer trends is our sourcing ability. We source each of our private label product lines separately based on the individual design, styling and quality specifications of those products. We do not own or operate any manufacturing facilities and rely primarily on third party foreign manufacturers in China, Brazil, Italy, Spain and other countries for the production of our private label merchandise. Our buying agents have relationships with these manufacturers and generally have been successful in minimizing the lead times for sourcing merchandise. These relationships have allowed us to work very close to our expected delivery dates. In addition, our test and react strategy supported by these strong relationships with manufacturers allows our merchandising and buying teams to test new styles and react quickly to fashion trends, while keeping fast-moving inventory in stock. For more information about risks associated with the foreign sourcing of our products, you should refer to “Risk Factors — Our merchandise is manufactured by foreign manufacturers; therefore, the availability and costs of our products may be negatively affected by risks associated with international trade” and “Risk Factors — Our reliance on manufacturers in China exposes us to supply risks.”

 

We believe that this sourcing of footwear products and our short lead times reduce our working capital investment and inventory risk, and enables more efficient and timely introduction of new product designs. We have not entered into any long-term manufacturing or supply contracts. We believe that a sufficient number of alternative sources exist for the manufacture of our products. The principal materials used in the manufacture of our footwear and accessory merchandise are available from numerous domestic and international sources.

 

Management, or our agents, perform an array of quality control inspection procedures at each stage in the production process, including examination and testing of prototypes of key products prior to manufacture, samples and materials prior to production and final products prior to shipment.

 

Substantially all merchandise for our stores is initially received, inspected, processed and distributed through one of our two distribution centers, each of which is part of a third-party warehousing system. Merchandise that is manufactured in China is delivered to our west coast distribution center located in Los Angeles, California and merchandise manufactured elsewhere in the world is delivered to our east coast distribution center located near Philadelphia, Pennsylvania. In accordance with our micro-merchandising strategy, our allocation teams determine how the product should be distributed among the stores based on current inventory levels, sales trends, specific product characteristics and the buyers’ input. Merchandise typically is shipped to the stores as soon as possible after receipt in our distribution centers using third party carriers, and any goods not shipped to stores are shipped to our warehouse facility in St. Louis, Missouri for replenishment purposes. We also fulfill our Internet store and catalog sales from our St. Louis facility.

 

Information Systems and Technology

 

Our information systems integrate our individual stores, merchandising, distribution and financial systems. Daily sales and cash deposit information is electronically collected from the stores’ point of sale terminals nightly. This allows management to make timely decisions in response to market conditions. These include decisions about pricing, markdowns, reorders and inventory management.

 

Our allocation and replenishment system, in conjunction with our point of sale system, allows us to execute our micro-merchandising strategy through efficient management and allocation of our store inventories. These systems allow us to respond quickly to fashion trends, identify and reduce our losses due to damage, theft or other reasons, and to monitor employee productivity. Our micro-merchandising strategy requires us to adapt the merchandise mix

by location, with different assortments depending on store level customer demographics. We have the capability to constantly monitor inventory levels and purchases by store, enabling us to manage our merchandise mix.

 

We believe that effective use of our systems allow us to manage our exposure to markdowns. We believe that our systems facilitate the process of controlling inventory commitments in light of changes in consumer demand. We believe that our buyers and inventory management team are able to efficiently adjust our store inventory levels to effectively control excess inventory and markdowns.

 

Marketing and Advertising

 

Our marketing includes in-store, high-impact, visual advertising. Marketing materials are positioned to exploit our high visibility, high traffic mall locations. Banners in our windows and signage on our walls and tables may highlight a particular fashion story, a seasonal theme or a featured piece of merchandise. We utilize promotional giveaways or promotional event marketing.

 

Every three weeks, we provide the stores with specific merchandise display directions from the corporate office. Our in-store product presentation utilizes a variety of different fixtures to highlight the breadth of our product line. Various fashion themes are displayed throughout the store utilizing combinations of styles and colors.

 

To cultivate brand loyalty, we offer our frequent buying card, the “B-Card.” This program currently allows our customers to purchase a B-Card for $25 and receive a 10% discount on most purchases for a twelve month period. We believe that this program strengthens customer loyalty.

 

We also market to customers who have provided us with their e-mail addresses via web-bursts, e-mail messages from Bakers announcing new product offerings and promotions.

 

Competition

 

We believe that our Bakers stores have no direct national competitors who specialize in full-service, moderate-priced fashion footwear for young women. Yet, the footwear and accessories retail industry is highly competitive and characterized by low barriers to entry.

 

Competitive factors in our industry include: brand name recognition; product styling; product quality; product presentation; product pricing; store ambiance; customer service; and convenience.

 

We believe that we match or surpass our competitors on the competitive factors that matter most to our target customer. We offer the convenience of being located in high-traffic, high-visibility locations within the shopping malls in which our customer prefers to shop. We have a focused strategy on our target customer that offers her the fun store atmosphere, full service and style that she desires.

 

Several types of competitors vie for our target customer:

 

 

Department stores generally are not located within the interior of the mall where our target customer prefers to shop with her friends. National branded wholesalers generally have a narrower line of footwear with higher average price points and target a more narrowly focused customer. Specialty retailers also cater to a different demographic than our target customer. Regional chains generally do not offer the depth of private label merchandise that we offer. National branded off-price retailers and discount stores do not provide the same level of fashion or customer service.

Apparel retailers, if they sell shoes or accessories, generally offer a narrow line of styles, which can encourage a customer to come to our store to purchase shoes or accessories to complement her new outfit. Our competitors sell a broad assortment of footwear and accessories that are similar and sometimes identical to those we sell, and at times may be able to provide comparable merchandise at lower prices. While each of these different distribution channels may be able to compete with us on fashion, value or service, we believe that none of them can successfully match or surpass us on all three of these elements.

 

Our Wild Pair stores compete on most of the same factors as Bakers. However, due to Wild Pair’s market position, it is subject to more intense competition from national specialty retailers and national branded wholesalers.

 

History of Bakers Shoe Stores

 

The first Bakers shoe store opened in Atlanta, Georgia, in 1924. Bakers grew to be one of the nation’s largest women’s moderately priced specialty fashion footwear retailers. At its peak in 1988, Bakers had grown to approximately 600 stores. At that time, it was one of several footwear, apparel and entertainment retail specialty chains that were owned and operated by Edison Brothers, which in 1995 had over 2,500 stores in the United States, Puerto Rico, the Virgin Islands, Mexico and Canada. Edison Brothers filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on November 3, 1995. After an unsuccessful reorganization, Edison Brothers refiled for bankruptcy on March 9, 1999, and immediately commenced a liquidation of all its assets. In June 1999, we purchased selected assets of the Bakers and Wild Pair chains, approximately 200 store locations and inventory, from Edison Brothers Stores, Inc. We retained the majority of Bakers’ employees and key senior management, merchandise buyers, store operating personnel and administrative support personnel. Subsequently, we closed or re-merchandised our prior stores into the Bakers or Wild Pair formats.

 

Employees

 

As of April 22, 2010, we employed approximately 571 full-time and 1,809 part-time employees with approximately 150 of our employees at our corporate offices and warehouse, and 2,231 employees at our store locations. The number of part-time employees fluctuates depending on our seasonal needs. None of our employees are represented by a labor union, and we believe our relationship with our employees is good.

 

Properties

 

All of our stores are located in the United States. We lease all of our store locations. Most of our leases have an initial term of approximately ten years. In addition to base rent, leases typically require us to pay property taxes, utilities, repairs, maintenance, common area maintenance and, in some instances, merchant association fees. Some of our leases also require contingent rent based on sales.

 

We lease approximately 38,000 square feet for our headquarters, located at 2815 Scott Avenue, St. Louis, Missouri 63103. The lease has approximately seven years remaining. We also lease an approximately 138,000 square foot warehouse in St. Louis with a remaining lease term of approximately six years.

 

Intellectual Property and Proprietary Rights

 

We acquired the right and title to several trademarks in connection with the Bakers acquisition, including our trademarks Bakers^tm and Wild Pair^®. In addition, we currently have several applications pending with the United States Patent and Trademark Office for additional registrations. For more information on our trademarks, please see “Risk Factors — Our ability to expand into some territorial and foreign jurisdictions under the trademarks “Bakers” and “Wild Pair” is restricted” and “Risk Factors — Our potential inability or failure to renew, register or otherwise protect our trademarks could have a negative impact on the value of our brand names.”

 

Seasonality

 

Our business is highly seasonal. We have five principal selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Our fourth quarter sales volume tends to be significantly higher than our other

quarters because our product offering during the Holiday season tends to include our higher price point merchandise such as boots and customer traffic tends to be substantially higher during the Holiday season. Consequently, we achieve our greatest leverage on fixed expenses and can generate our highest profit margin levels during the fourth quarter. We have two of our five clearance sales during the third quarter and, consequently, we achieve our least leverage on fixed expenses and generate our lowest profit levels during the third quarter. Our working capital requirements fluctuate during the year, increasing prior to peak shopping seasons as we increase inventory levels to meet anticipated peak demand. You should also refer to “Risk Factors — Our overall profitability is highly dependent upon our fourth quarter results,” “Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

 

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

 

This Annual Report on Form 10-K includes, and our other periodic reports and public disclosures may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve known and unknown risks and uncertainties or other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on those statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after such dates. You should read this Form 10-K completely and with the understanding that our actual results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

These risks, uncertainties and other factors may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements:

 

 

Risk Factors

 

Our failure to identify and respond to changing consumer fashion preferences in a timely manner would negatively impact our sales, profitability, liquidity and our image as a fashion resource for our customers.

 

The footwear industry is subject to rapidly changing consumer fashion preferences. Our sales, net income and liquidity are sensitive to these changing preferences, which can be rapid and dramatic. Accordingly, we must identify and interpret fashion trends and respond in a timely manner. We continually market new styles of footwear, but demand for and market acceptances of these new styles are uncertain. Our failure to anticipate, identify or react appropriately to changes in consumer fashion preferences may result in lower sales, higher markdowns to reduce excess inventories, lower gross profits and negatively impact our financial liquidity. Conversely, if we fail to anticipate consumer demand for our products, we may experience inventory shortages, which would result in lost

sales and could negatively impact our customer goodwill, our brand image and our profitability. Moreover, our business relies on continuous changes in fashion preferences. Stagnating consumer preferences could also result in lower sales and would require us to take higher markdowns to reduce excess inventories. For example, in fiscal years 2006, 2007, and 2008 our product offerings did not adequately reflect changes in consumer fashion trends, primarily sandals in the spring and for boots in the fall, which negatively impacted sales and profitability See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

If we cannot maintain generally positive sales trends, we could fail to maintain a liquidity position adequate to support our ongoing operations.

 

Our ability to maintain and ultimately improve our liquidity position is highly dependent on sustaining the positive sales trends that began in June 2008 and have continued through 2009. Our comparable store sales for the last three quarters of fiscal year 2008 increased 4.7% and our comparable store sales for fiscal year 2009 increased 1.3%. Through the first 12 weeks of fiscal year 2010 comparable stores sales decreased 1.4%. Our comparable store sales for fiscal year 2006 and fiscal year 2007 decreased 7.1% and 12.3%, respectively. Our net losses in recent years have negatively impacted our liquidity and financial position. At January 30, 2010, we had negative working capital of $14.3 million, unused borrowing capacity under our revolving credit facility of $1.9 million, and our shareholders’ equity had declined to $2.1 million. If positive sales trends do not continue, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity, or take additional cost cutting measures. Any future financing would be subject to our financial results, market conditions and the consent of our lenders. We may not be able to obtain additional financing or we may only be able to obtain such financing on terms that are substantially dilutive to our current shareholders and that may further restrict our business activities. If we cannot obtain needed financing, our operations may be materially negatively impacted and we may be forced into bankruptcy or to cease operations and you could lose your investment in the Company.

 

The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq could negatively impact the value of our common stock and decrease the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock.

 

In September 2009, we transferred the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market where our common stock is currently listed. The Nasdaq Stock Market (Nasdaq) has minimum requirements that a company must meet in order to remain listed on The Nasdaq Capital Market. These requirements include maintaining a minimum stockholders’ equity of $2.5 million, a minimum closing bid price of $1.00 per share and also include maintaining a minimum market value of publicly held shares. As of October 31, 2009, we did not meet the minimum shareholders’ equity requirement. On December 14, 2009 we received a staff deficiency letter from Nasdaq informing us that, based on its stockholders’ deficit as reported in our Quarterly Report on Form 10-Q filed on December 9, 2009, we did not meet the $2.5 million minimum stockholders’ equity required for continued listing on the Capital Market. In response to this letter, we submitted a plan of compliance to Nasdaq. On January 21, 2010 Nasdaq granted us an extension until March 29, 2010 to demonstrate compliance with this standard. On March 29, 2010, after we reported our fourth quarter results showing stockholders’ equity of $2.1 million, we received a staff deficiency letter from Nasdaq stating that the Company did not meet the minimum stockholders’ equity requirement within the extension period. If we would not have appealed this determination, our common stock would have been suspended from trading at the open of business on April 7, 2010 and our securities would have been removed from listing and registration on Nasdaq.

 

We appealed this staff deficiency letter and have been granted a hearing to be held on May 6, 2010. We have appealed this determination based on our improved operating results over the past two years, positive sales momentum in 2010, and positive cash flow. However, we believe that it is likely that our operating results will not allow us to regain compliance with the Nasdaq minimum stockholders’ equity requirement during fiscal year 2010. Therefore, we can give no assurance that our appeal will be successful.

 

If the our appeal is unsuccessful and our common stock is delisted from Nasdaq, we expect to have our common stock quoted on the OTC Bulletin Board or the “Pink Sheets.” However, a market maker must apply to

register and quote the Common Stock for the OTC Bulletin Board or “Pink Sheets.” We have held preliminary discussions with potential market makers and believe that such market makers will be willing to do so. Since this process is not within our direct control, however, there is no assurance that the Company’s securities will be quoted on the OTC Bulletin Board or the “Pink Sheets.” If our stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. These factors could have a material adverse effect on the trading price, liquidity, volatility, value and marketability of our common stock and could have a material adverse effect on our ability to obtain adequate financing for the continuation of our operations.

 

The report issued by our independent registered public accounting firm on our fiscal year 2009 financial statements contains language expressing substantial doubt about our ability to continue as a going concern.

 

The report of our independent registered public accounting firm for the fiscal year ended January 30, 2010, states that our recent losses raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset and liability amounts that might be necessary if we cease to function as a going concern. See Note 2 to our financial statements. This audit report could adversely affect our relationships with our landlords, our suppliers, our ability to raise additional capital and to execute our business plan, and could have a material adverse effect on our business, financial condition and results of operations. Moreover, if we cease to function as a going concern you may lose your investment in the Company.

 

Our revolving credit facility is scheduled to expire on January 31, 2011 and our continued operations are reliant upon our ability to either renew or replace this facility.

 

We have a $30.0 million secured revolving credit facility with Bank of America, N.A. We routinely depend on our credit facility and may use a large percentage of the facility to fund our inventory purchases and our capital expenditures. The facility is scheduled to expire on January 31, 2011. We are currently negotiating with the bank to renew the facility. Although we believe that we will be successful in negotiating a renewal or replacement, there is no assurance that we will be able to do so. In the event that we were to be unable to renew the facility with the bank or unable to replace the facility with a similar facility with another financial institution, it would become necessary for us to obtain additional sources of liquidity. We may not be able to obtain additional financing or we may only be able to obtain such financing on terms that are substantially dilutive to our current shareholders and that may further restrict our business activities. If we cannot obtain needed financing, our operations may be materially negatively impacted and we may be forced into bankruptcy or to cease operations and you could lose your investment in the Company.

 

Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility.

 

Our business is seasonal, with a substantial portion of our profitability and cash flow occurring during our fourth quarter. We rely on draws from our revolving credit facility to fund seasonal working capital requirements during our year. Draws on our credit facility are limited by both an overall limit of $30 million and also by a calculated borrowing base that varies according to a formula based on inventory and accounts receivable and is generally less than the $30 million overall limit. As of January 30, 2010, we had an outstanding balance on our credit facility of $10.5 million and unused borrowing capacity, calculated in accordance with the agreement, of $1.9 million. As of April 24, 2010, we had an outstanding balance of $14.3 million and unused borrowing capacity of $2.0 million. To the extent we were to fail to generate sufficient cash from operating activities or from other financing activities, we could encounter availability constraints related to our operating activities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities.”

Our credit facility restricts our activities.

 

Our credit facility includes financial and other customary covenants which, among other things require us to maintain a minimum availability, restrict our business activities and our ability to incur debt, make acquisitions, pay dividends, and repurchase our stock. A change in control of our Company, including any person or group acquiring beneficial ownership of 40% or more of our common stock or our combined voting power (as defined in the credit facility), is also prohibited.

 

In the event that we were to violate any of the covenants in our credit facility, or if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as a result of certain sales of our common stock), the lender would have the right to accelerate repayment of all amounts outstanding under the credit agreement, or to commence foreclosure proceedings on our assets.

 

For more information about our credit facility, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

The terms of our subordinated secured term loan contain certain covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness and subject us to a cross-default under our credit facility.

 

Although we have entered into an amendment with our lenders to eliminate certain financial covenants regarding specified levels of adjusted EBITDA and tangible net worth (both as defined in the loan agreement) each fiscal quarter, our loan agreement still contains annual limits on capital expenditures. We are also subject to restrictive covenants, including covenants that restrict our ability to incur additional indebtedness, to pre-pay other indebtedness, to dispose of assets, to effect certain corporate transactions, including specified mergers and sales of all or substantially all of our assets, to change the nature of our business, to pay dividends (other than in the form of common stock dividends), as well as covenants that limit transactions with affiliates and prohibit a change of control (as defined in the loan agreement). The loan agreement generally provides for customary events of default, including default in the payment of principal or interest or other required payments, failure to observe or perform covenants or agreements contained in the transaction documents (subject to certain limited exceptions), materially breaching our senior credit facility or the terms of our subordinated convertible debentures, generally failure to pay when due debt obligations (broadly defined, subject to certain exceptions) in excess of $1 million, specified events of bankruptcy or specified judgments against us.

 

Upon the occurrence of an event of default under the term loan, the lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to a senior subordination agreement that was entered into with Bank of America, N.A., with the interest rate increasing to 17.5% per annum. Defaults under our term loan could also result in cross-acceleration of our senior credit facility and our subordinated convertible debentures. If an event of default occurs under the term loan, we may be unable to negotiate a mutually acceptable modification of the loan with the lender and we may not have sufficient funds to pay the total amount of accelerated obligations, and our lenders under the senior secured credit facility and subordinated secured term loan could proceed against the collateral securing the loan. Any acceleration in the repayment of our indebtedness or related foreclosure could adversely affect our business.

 

An amendment to maintain compliance with our loan covenants, if any, may be extremely expensive. In order to obtain the consent of our senior lender for such amendments, we have also agreed to modify the terms of our senior credit facility, which included an increase in the interest rate and certain fees. However, there can be no assurance that we would be able to obtain additional amendments in the future.

 

A continued decline in general economic conditions could lead to reduced consumer demand for our footwear and accessories and could lead to reduced sales.

 

In addition to consumer fashion preferences, consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, gas prices, consumer confidence and consumer perception of economic conditions. The current slowdown in the United States economy and

uncertain economic outlook could adversely affect consumer spending habits, which would likely result in lower net sales than expected on a quarterly or annual basis.

 

Our overall profitability is highly dependent upon our fourth quarter results.

 

Our fourth quarter sales volume tends to be significantly higher than our other quarters because our product offering during the Holiday season tends to include our higher price point merchandise such as boots and customer traffic tends to be substantially higher during the Holiday season. Consequently, we achieve our greatest leverage on fixed expenses and generate our highest profit levels during the fourth quarter. Should our product offerings not meet with customer acceptance during the fourth quarter, it would have a substantial negative impact on the overall results for the year. For example, in the fourth quarter of fiscal year 2008, positive sales trends slowed considerably from mid-December through year end resulting in lower than expected fourth quarter net sales and gross profit.

 

Our operations are subject to quarterly fluctuations that can impact our profitability and liquidity.

 

In addition to customer shopping patterns, our quarterly results are affected by a variety of other factors, including:

 

 

Due to factors such as these, our quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate in the future. For example, net income for the fourth quarter of fiscal year 2008 was substantially less than the fourth quarter of 2007. For more information, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

 

We are subject to risks associated with leasing our stores, including those stores where we acquired the lease through bankruptcy auctions.

 

We lease our store locations under individual leases. Approximately one-half of our stores are located in properties managed by two national property management companies. A number of our leases include termination and default provisions which apply if we do not meet certain sales levels, specified dilution in or changes of ownership of our Company occur, or in other circumstances. In addition, our leases subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters. Moreover, each year a significant portion of our leases are subject to renewal or termination. If one or more of our landlords decides to terminate our leases, or to not allow us to renew, our business could be materially and adversely affected. We initially acquired many of our current leases from Edison Brothers, as debtor-in-possession, or from other bankrupt entities through auctions in which a bankruptcy court ordered the assignment of the debtor’s interest in the leases to us. As a result, we have not separately negotiated many of our leases, which are generally drafted in favor of the landlord.

 

Our market share may be adversely impacted at any time by a significant number of competitors.

 

We operate in a highly competitive environment characterized by low barriers to entry. We compete against a diverse group of competitors, including national branded wholesalers, national specialty retailers, regional chains, national branded off-price retailers, traditional department stores, discounters and apparel retailers. Many of our competitors are larger and have substantially greater resources than we do. Our market share and results of

operations could be adversely impacted by this significant number of competitors or the introduction of new competitors. For more information about our competition, please see “Business — Competition.”

 

The departure of members of our senior management team could adversely affect our business.

 

The success of our business depends upon our senior management closely supervising all aspects of our business, in particular, the operation of our stores and the design, procurement and allocation of our merchandise. Retention of senior management is especially important in our business due to the limited availability of experienced and talented retail executives. If we were to lose the services of Peter Edison, our Chairman, Chief Executive Officer and President, or other members of our senior management, our business could be adversely affected if we were unable to employ a suitable replacement in a timely manner.

 

Our failure to maintain good relationships with our manufacturers could harm our ability to procure quality inventory in a timely manner.

 

Our ability to obtain attractive pricing, quick response, ordering flexibility and other terms from our manufacturers depends on their perception of us and our buying agents. We do not own any production facilities or have any long term contracts with any manufacturers, and we typically order our inventory through purchase orders. Any disruption in our supply chain could quickly impact our sales. Our failure or the failure of our buying agents to maintain good relationships with these manufacturers could increase our exposure to changing fashion cycles, which may lead to increased inventory markdown rates. It is possible that we could be unable to acquire sufficient quantities or an appropriate mix of merchandise or raw materials at acceptable prices. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In this event, unless we are able to obtain replacement products in a timely manner, we may lose sales. We are also subject to risks related to the availability and use of materials and manufacturing processes for our products, including those which some may find objectionable.

 

We rely on a small number of buying agents and private label vendors for a substantial portion our merchandise purchases, and our failure to maintain good relationships with any of them could harm our ability to source our products.

 

For fiscal year 2009, five buying agents/private label vendors accounted for approximately 49% of our merchandise purchases, with one private label vendor accounting for approximately 16% of our merchandise purchases. Our buying agents and private label vendors assist in developing our private label merchandise, arrange for the purchase of necessary materials and contract with manufacturers. We execute nonexclusive agreements with some of our buying agents. These agreements prohibit our buying agents from sharing commissions with manufacturers, owning stock or holding any ownership interest in, or being owned in any way by, any of our manufacturers or suppliers. The agreements do not prohibit our buying agents from acting as agents for other purchasers, which could negatively impact our sales. If they were to disclose our plans or designs to our competitors, our sales may be materially adversely impacted. The loss of any of these key buying agents or a breach by them of our buying agent agreements could adversely affect our ability to develop or obtain merchandise.

 

Our merchandise is manufactured by foreign manufacturers; therefore, the availability and costs of our products may be negatively affected by risks associated with international trade.

 

Although all of our stores are located in the United States, virtually all of our merchandise is produced in China, Brazil, Italy, Spain and other foreign countries. Therefore, we are subject to the risks associated with international trade, which include:

 

 

 

Our imported products are subject to United States customs duties, which make up a material portion of the cost of the merchandise. If customs duties are substantially increased, it would harm our profitability. The United States and the countries in which our products are produced may impose new quotas, duties, tariffs, or other restrictions, or adversely adjust prevailing quota, duty, or tariff levels, any of which could have a harmful effect on our profitability.

 

Furthermore, when declaring the duties owed on and the classifications of our imported products, we make various good faith assumptions. We regularly employ a third party to review our customs declarations, and we will notify the appropriate authorities if any erroneous declarations are revealed. However, the customs authorities retain the right to audit our declarations, which could result in additional tariffs, duties and/or penalties if the authorities believe that they have discovered any errors.

 

A decline in the value of the United States dollar relative to other currencies, especially the Chinese yuan could negatively impact our gross margins.

 

The value of the United States dollar has declined relative to the Chinese yuan since our initial public offering in 2004. Although our inventory purchase transactions are denominated in United States dollars which eliminates exchange rate risks on established contracts, the decline in the value of the United States dollar has resulted in increases in the costs of our Chinese sourced products. In the event of a further decline in the United States dollar or economy, it may mot be possible for us to increase or maintain an increase in our average selling prices sufficient to fully or partially reflect these cost increases. To the extent that we are unable to offset such cost increases there would be a negative impact on our gross margins.

 

Our reliance on manufacturers in China exposes us to supply risks.

 

Manufacturing facilities in China produce a significant portion of our products. Generally, a substantial majority of our private label footwear units are manufactured in China and virtually all of our private label accessories are manufactured in China each year. The Chinese economy is subject to periodic energy and labor shortages, as well as transportation and shipping bottlenecks. In prior years, there have been delays at ports on the West Coast of the United States. These matters, changes in the Chinese government or economy, or the current tariff or duty structures or adoption by the United States of trade polices or sanctions adverse to China, could harm our ability to obtain inventory in a timely and cost effective manner.

 

Our ability to expand into some territorial and foreign jurisdictions under the trademarks “Bakers” and “Wild Pair” is restricted.

 

When we acquired selected assets of the Bakers and Wild Pair chains from Edison Brothers Stores, Inc. in a bankruptcy auction in June 1999, we were assigned title to and the right to use the trademarks “Bakers,” “The Wild Pair,” “Wild Pair” and other trademarks to the extent owned by Edison Brothers at that time. Our rights to use the trademarks are subject to a Concurrent Use Agreement which recognizes the geographical division of the trademarks between us and a Puerto Rican company. At approximately the same time as we acquired our rights and title, Edison Brothers also assigned to the Puerto Rican company title to and the right to use the trademarks, subject to the Concurrent Use Agreement. Under the Concurrent Use Agreement, we and the Puerto Rican company agree that the Puerto Rican company has the exclusive right to use the trademarks in the Commonwealth of Puerto

Rico, the U.S. Virgin Islands, Central and South America, Cuba, the Dominican Republic, the Bahamas, the Lesser Antilles and Jamaica and that we have the exclusive right to use the trademarks in the United States and throughout the world, except for the territories and jurisdictions in which the Puerto Rican company was assigned the rights. Consequently, we do not have the right to use the trademarks “Bakers” and “Wild Pair” in those territories and foreign jurisdictions in which the Puerto Rican company owns the trademark rights, which may limit our growth.

 

Our potential inability or failure to renew, register or otherwise protect our trademarks could have a negative impact on the value of our brand names.

 

Because the trademarks assigned to us by Edison Brothers are subject to the Concurrent Use Agreement, the U.S. trademark applications and registrations are jointly owned by us and a Puerto Rican company, which could impair our ability to renew and enforce the assigned applications and registrations. Simultaneously with the Puerto Rican company, we have filed separate concurrent use applications for the “Bakers” and “Wild Pair” trademarks, and we have requested that existing applications for the trademark “Bakers” also be divided territorially. While we are in agreement with the Puerto Rican company that confusion is not likely to result from concurrent use of the trademarks in our respective territories, the United States Patent and Trademark Office may not agree with our position. If we are not able to register or renew our trademark registrations, our ability to prevent others from using trademarks and to capitalize on the value of our brand names may be impaired. Further, our rights in the trademarks could be subject to security interests granted by the Puerto Rican company. Our potential inability or failure to renew, register or otherwise protect our trademarks and other intellectual property rights could negatively impact the value of our brand names.

 

We would be adversely affected if our distribution operations were disrupted.

 

The efficient operation of our stores is dependent on our ability to distribute merchandise manufactured overseas to locations throughout the United States in a timely manner. We depend on third parties to ship, receive and distribute substantially all of our merchandise. A third party operating in China manages the shipping of merchandise from China either to a third party operating our Los Angeles, California distribution center or for delivery directly to our stores through Los Angeles. The third party in Los Angeles, California accepts delivery of a significant portion of our merchandise from Asia, and another third party near Philadelphia, Pennsylvania accepts delivery of our merchandise from elsewhere. These parties located in the United States have provided these services to us pursuant to written agreements since 1999 and 2000. One of these agreements is terminable upon 30 days notice. We also continue to operate under the terms of an expired agreement with the remaining third party. Merchandise not shipped to our stores is shipped to our company operated warehouse. We also rely on our computer network to coordinate the distribution of our products. If we need to replace one of our third party service providers, if our warehouse or computer network is shut down for any reason or does not operate efficiently, our operations could be disrupted for a substantial period of time while we identify and integrate a replacement into our system. Any such disruption could materially negatively impact our ability to maintain sufficient inventory in our stores and consequently our profitability.

 

The market price of our common stock may be materially adversely affected by market volatility.

 

The market price of our common stock is expected to be highly volatile, both because of actual and perceived changes in our financial results and prospects and because of general volatility in the stock market. The factors that could cause fluctuations in our stock price may include, among other factors discussed in this section, the following:

 

 

We are controlled by a small group of shareholders whose interests may differ from other shareholders.

 

A substantial portion of our stock ownership is concentrated among a relatively small number of mutual funds and hedge funds whose interests may differ from our other shareholders or could impact our company including any potential change of control. Accordingly, these shareholders will continue to have significant influence in determining the outcome of all matters submitted to shareholders for approval, including the election of directors and significant corporate transactions. The interests of these shareholders may differ from the interests of other shareholders, and their concentration of ownership may have the effect of delaying or preventing a change in control that may be favored by other shareholders. As long as these people are among our principal shareholders, they will have the power to significantly influence the election of our entire board of directors.

 

Peter Edison’s employment agreement entitles him to a one time payment equal to three times his current base salary (as defined in the agreement) upon the occurrence of certain events, including following a change of control of the Company if there is generally a material reduction in the nature of his duties or his base salary, or he is not allowed to participate in certain bonus plans. For this purpose, a change of control generally includes the acquisition by a person or group of more of our common stock than that held by Peter Edison. More than one of our shareholders has filed a Schedule 13D or G reporting beneficial ownership in an amount in excess of that beneficially owned by Peter Edison and our current management.

 

The public sale of our common stock by selling shareholders could adversely affect the price of our common stock.

 

The market price of our common stock could decline as a result of market sales by our shareholders, including under our resale registration statements, or the perception that these sales will occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

There is relatively limited trading in our common stock.

 

The trading volume of our common stock is relatively limited, which we expect to continue. Therefore, our stock may be subject to higher volatility or illiquidity than would exist if our shares were traded more actively.

 

Our charter documents and Missouri law may inhibit a takeover, which may cause a decline in the value of our stock.

 

Provisions of our restated articles of incorporation, our restated bylaws and Missouri law could make it more difficult for a third party to acquire us, even if closing the transaction would be beneficial to our shareholders. For example, our restated articles of incorporation provide, in part, that directors may be removed from office by our shareholders only for cause and by the affirmative vote of not less than two-thirds of our outstanding shares and that vacancies may be filled only by a majority of remaining directors. Under our restated bylaws, shareholders must follow detailed notice and other requirements to nominate a candidate for director or to make shareholder proposals. In addition, among other requirements, our restated bylaws require at least a two-thirds vote of shareholders to call a special meeting. Moreover, Missouri law and our bylaws provide that any action by written consent must be unanimous. Furthermore, our bylaws may be amended only by our board of directors. Certain amendments to our articles of incorporation require the vote of two-thirds of our outstanding shares in certain circumstances, including the provisions of our articles of incorporation relating to business combinations, directors, bylaws, limitations on director liabilities and amendments to our articles of incorporation. We are also generally subject to the business combination provisions under Missouri law, which allow our board of directors to retain discretion over the approval of certain business combinations. In our bylaws, we have elected to not be subject to the control shares acquisition provision under Missouri law, which would deny an acquiror voting rights with respect to any shares of voting stock which increase its equity ownership to more than specified thresholds. These and other provisions of Missouri law and our articles of incorporation and bylaws, our board’s authority to issue preferred stock and the lack of cumulative voting in our articles of incorporation may have the effect of making it more difficult for shareholders to change the composition of our board or otherwise to bring a matter before shareholders without our board’s consent. Such items may reduce our vulnerability to an unsolicited takeover proposal and may have the effect of

delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price of our common stock.

 

Executive Officers of the Registrant

 

The information set forth herein under the caption “Item 10. Directors, Executive Officers and Corporate Governance — Executive Officers of the Registrant” is incorporated herein by reference.

 

 

Information set forth in Item 1 of this report under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” is incorporated herein by this reference.

 

 

None.

 

 

Information relating to properties set forth in Item 1 of this report under “Item 1. Business — Stores” is incorporated herein by this reference. Information relating to properties set forth in Item 1 of this report under “Item 1. Business — Properties” is incorporated herein by this reference. All of our stores are located in the United States.

 

 

From time to time, the Company is involved in ordinary routine litigation common to companies engaged in the Company’s line of business. Currently, the Company is not involved in any material pending legal proceedings.

 

 

 

Market Information and Holders

 

The common stock of Bakers Footwear Group, Inc. has been quoted in the Nasdaq Capital Market under the symbol “BKRS” since September 2009. Prior to that the common stock was quoted on the Nasdaq Global Market since February 5, 2004. Prior to this time, there was no public market for the Company’s common stock. The initial public offering price of the Company’s common stock was $7.75 per share. The closing sales price of Bakers Footwear Group, Inc.’s common stock on the Nasdaq was $2.62 per share on April 23, 2010. As of April 23, 2010, we estimate that there were approximately 35 holders of record and approximately 1,100 beneficial owners of the Company’s common stock. Please see “Item 1. Business — Risk Factors — The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq could negatively impact the value of our common stock and decrease the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock.”

The following table summarizes the range of high and low sales prices for the Company’s common stock during fiscal years 2008 and 2009.

 

 

Dividends

 

We have declared no dividends subsequent to our initial public offering in 2004. We currently intend to retain our earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Any future payments of dividends will be at the discretion of our board of directors and will depend upon factors as the board of directors deems relevant. Our revolving credit facility and subordinated secured term loan generally prohibit the payment of dividends, except for common stock dividends. We give no assurance that we will pay or not pay dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

None.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The information with respect to “Equity Compensation Plan Information” in Item 12 hereof is incorporated herein by reference.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

During fiscal year 2009, the Company did not repurchase any Company securities.

 

The following table summarizes certain selected financial data for each of the five fiscal years in the period ended January 30, 2010 and have been derived from our audited financial statements. Our audited financial statements for the three fiscal years ended January 30, 2010 are included elsewhere in this Annual Report on Form 10-K. The information contained in these tables should be read in conjunction with our financial statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.

 

 

 

 

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and “Item 1. Business — Risk Factors” and elsewhere in this annual report. The following section is qualified in its entirety by this more detailed information and our Financial Statements and the related Notes thereto, included elsewhere in this Annual Report on Form 10-K.

 

Overview

 

We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of January 30, 2010, we operated 238 stores, including the 19 store Wild Pair chain that targets men and women between the ages of 17 and 29 who desire edgier, fashion forward footwear. As of April 24, 2010 we operated 239 stores, including 19 Wild Pair stores.

 

We incurred net losses of $9.1 million and $15.0 million in fiscal years 2009 and 2008, but made significant progress during 2009 and 2008 in refocusing our inventory lines and maintaining cost control. We achieved increases in comparable store sales of 1.3% and 0.5% in fiscal years 2009 and 2008, respectively. In fiscal year 2009 we increased gross margin by 127 basis points and reduced selling, general and administrative expenses by 171 basis points as a percentage of sales on top of a 200 basis point increase in gross margin and a 200 basis point reduction in selling, general and administrative expenses achieved in fiscal year 2008. These improvements were made despite being negatively impacted by the sharp economic slowdown beginning in fall 2008.

 

Our losses in the last three years have had a significant negative impact on our financial position and liquidity. As of January 30, 2010, we had negative working capital of $14.3 million, unused borrowing capacity under our revolving credit facility of $1.9 million, and our shareholders’ equity had declined to $2.1 million.

 

Our business plan for fiscal year 2010 is based on mid-single digit increases in comparable store sales for the remainder of the year, although comparable store sales through April 24, 2010 are down 1.4%. Based on our business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2010. The business plan reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2009. The plan also includes continued control over selling, general and administrative expenses. We continue to work with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2010 reflects continued improvement in cash flow, but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in our business plan.

In fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan due February 1, 2011. As of April 24, 2010, the balance on our term loan was $2.2 million, with monthly principal and interest payments due through February 1, 2011. Originally, the term loan agreement contained financial covenants requiring us to maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) measured each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009 and March 2010) to modify these covenants in order to remain in compliance. The March 2010 amendment completely eliminated these covenants for the remainder of the term loan. As consideration for the initial loan and the May 2008 amendment thereto, we issued 400,000 shares of our common stock and paid an advisory fee of $300,000 and costs and expenses. As consideration for the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an additional 250,000 shares of our common stock. We did not pay any fees in connection with the March 2010 amendment.

 

In order to obtain our senior lender’s consent to the April 2009 and September 2009 amendments to our subordinated secured term loan, we amended our credit facility in those months. Among other things, the amendments extended the maturity from August 31, 2010 to January 31, 2011, reduced the credit ceiling from $40 million to $30 million, generally increased the interest rate from the bank’s prime rate to the prime rate plus 3.5%, eliminated a grace period for failing to maintain a minimum availability and implemented other amendments to the agreement, including increasing certain fees. As additional consideration for the amendments and the extension of the maturity date of the facility, we paid a total of $155,000 in fees. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of April 24, 2010, the balance on our revolving line of credit was $14.3 million and our unused borrowing capacity was $2.0 million.

 

Our business plan is premised on our ability to renew or replace our existing credit facility which is scheduled to expire on January 31, 2011 at terms comparable to the existing terms. Although we believe that we will be successful in this effort, there is no assurance that we will be able to do so. If we are unable to extend our credit facility, it would become necessary for us to obtain additional sources of liquidity to continue to operate.

 

We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. In recognition of existing liquidity constraints, we continue to look for additional sources of capital at acceptable terms. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See “Item 1. Business — Risk Factors — “If we cannot maintain generally positive sales trends, we could fail to maintain a liquidity position adequate to support our ongoing operations.” herein.

 

For additional information on our loan arrangements, please see “— Liquidity and Capital Resources” herein and “Item 1. Business — Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 1. Business — Risk Factors — Our credit facility restricts our activities” herein.

 

As a result of our reduced shareholders’ equity, in September 2009 we transferred the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market, the lowest tier of The Nasdaq Stock Market (“Nasdaq”). On March 29, 2009, Nasdaq issued a determination to delist our common stock as a result of our failing to meet the $2.5 million minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. We are currently in the process of appealing Nasdaq’s determination, which has temporarily stayed our de-listing from Nasdaq. However, we believe that it is likely that our operating results will not allow us to regain compliance with the Nasdaq minimum stockholders’ equity requirement during fiscal year 2010. Therefore, we can give no assurance that our appeal will be successful. Delisting could limit our ability to raise capital from the sale of securities. Please see “Item 1. Business — Risk Factors — The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq could negatively impact the value of our common stock and decrease the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock.”

 

Our independent registered public accounting firm’s report issued in this Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our

ability to continue as a going concern, including our recent losses and working capital deficiency. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2009 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” herein.

 

We operate on a 52 — 53 week fiscal year. Fiscal years 2009, 2008 and 2007 were 52 week periods. For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling. We include our Internet and catalog sales (“Multi-Channel Sales”) as one store in calculating our comparable store sales. Comparable store sales for fiscal year 2009 compare the fifty-two week period ended January 30, 2010 to the fifty-two week period ended January 31, 2009. Comparable store sales for fiscal year 2008 compare the fifty-two week period ended January 31, 2009 to the fifty-two week period ended February 2, 2008.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions about future events and their impact on amounts reported in our Financial Statements and related Notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. These differences could be material to the financial statements. For more information, please see Note 1 in the Notes to the Financial Statements.

 

We believe that our application of accounting policies, and the estimates that are inherently required by these policies, are reasonable. We believe that the following significant accounting policies may involve a higher degree of judgment and complexity.

 

Merchandise inventories

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. Consideration received from vendors relating to inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying expenses after an agreement with the vendor is executed and when the related inventory is sold. We physically count all merchandise inventory on hand annually, generally during the month of January, and adjust the recorded balance to reflect the results of the physical counts. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying costs. Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. In determining permanent markdowns, we consider current and recently recorded sales prices, the length of time product is held in inventory, and quantities of various product styles contained in inventory, among other factors. The process of determining our expected adjustments to retail prices requires significant judgment by management. The ultimate amount realized from the sale of inventories could differ materially from our estimates. If market conditions are less favorable than those projected, additional inventory markdowns may be required.

 

Store closing and impairment charges

 

Long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores indicated to be impaired are written down to fair value. During the years ended February 2, 2008, January 31, 2009 and January 30, 2010, we

recorded $3,131,169, $2,609,588, and $2,762,273, respectively, in noncash charges to earnings related to the impairment of long-lived assets.

 

Stock-based compensation expense

 

We compensate certain employees with various forms of share-based payment awards and recognize compensation expense for stock-based compensation based on the grant date fair value. Stock-based compensation expense is then recognized ratably over the service period related to each grant. We determine the fair value of stock-based compensation using the Black-Scholes option pricing model, which requires us to make assumptions regarding future dividends, expected volatility of our stock, and the expected lives of the options. We also make assumptions regarding the number of options and the number of shares of restricted stock and performance shares that will ultimately vest. The assumptions and calculations are complex and require a high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that must be updated as necessary with any resulting change recognized as an increase or decrease in compensation expense at the time the estimate is changed. Excess tax benefits related to stock option exercises be reflected as financing cash inflows and operating cash outflows.

 

During fiscal year 2006 and fiscal year 2007, we made grants of performance shares under our 2005 Incentive Compensation Plan. Based upon the degree of achievement of performance objectives for net sales and return on average assets through performance periods through fiscal year 2009, no shares of common stock were issued under these performance share grants. During fiscal years 2007 and 2009, we granted 69,000 shares and 84,000 shares, respectively, of restricted stock under our 2005 Incentive Compensation Plan. During fiscal years 2007, 2008, and 2009 we granted 272,613, 310,500, and 72,000 stock options, respectively, under our 2003 Stock Option Plan.

 

As of January 30, 2010, the total unrecognized compensation cost related to non vested stock-based compensation is $513,142, and the weighted-average period over which this compensation is expected to be recognized is 1.3 years.

 

Deferred income taxes

 

We calculate income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations.

 

We regularly assesses available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable income. Accounting standards place significant restrictions on the consideration of future taxable income in determining the realizability of deferred tax assets in situations where a company has experienced a cumulative loss in recent years. When sufficient negative evidence exists that indicates that full realization of deferred tax assets is no longer more likely than not, a valuation allowance is established as necessary against the deferred tax assets, increasing our income tax expense in the period that such conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence, such as a sustained return to profitability, arises that would indicate that realization of deferred tax assets is once again more likely than not, any existing valuation allowance would be reversed as appropriate, decreasing our income tax expense in the period that such conclusion is reached.

 

Based on our analyses during fiscal year 2008 and fiscal year 2009, we concluded that the realizability of net deferred tax assets was unlikely, and maintained a full valuation allowance against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

We anticipate that until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, we will not recognize any material income tax expense or benefit in our statement of operations for future periods, as pretax profits or losses generally will generate tax effects that will be offset by decreases or increases in the valuation allowance with no net effect on the statement of operations. If a pattern of continuing profitability is re-established and we conclude that it is more likely than not that deferred income tax assets are realizable, we will reverse any remaining valuation allowance which will result in the recognition of an income tax benefit in the period that it occurs.

 

We regularly analyze filing positions in all of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. Our federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of January 30, 2010 and January 31, 2009, we did not record any unrecognized tax benefits. Our policy, if we had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

 

Fiscal Year

 

Our fiscal year is based upon a 52 — 53 week retail calendar, ending on the Saturday nearest January 31. The fiscal years ended January 30, 2010 (fiscal year 2009), January 31, 2009 (fiscal year 2008) and February 2, 2008 (fiscal year 2007) are 52 week periods.

 

Results of Operations

 

The following table sets forth our operating results, expressed as a percentage of sales, for the periods indicated.

 

 

The following table sets forth our number of stores at the beginning and end of each period indicated and the number of stores opened, acquired and closed during each period indicated.

 

Fiscal Year Ended January 30, 2010 Compared to Fiscal Year Ended January 31, 2009

 

Net sales.  Net sales were $185.4 million in fiscal year 2009, up from $183.7 million for fiscal year 2008, an increase of $1.7 million or 0.9%. Comparable store sales in fiscal year 2009 increased 1.3% compared to a 0.5% increase in fiscal year 2008. Sales reflected strong sandal sales during the summer months, favorable sales trends across all key categories, particularly in boots and booties during the fall, offset by weakness in closed footwear and early fall transitional product. Average unit selling prices decreased 1.9% reflecting slightly lower price points compared to fiscal year 2008. Unit sales volume increased 2.5%. Our multi-channel sales increased 4.0% to $10.4 million in fiscal year 2009.

 

Gross profit.  Gross profit increased to $53.4 million in fiscal year 2009 from $50.6 million in fiscal year 2008, an increase of $2.8 million or 5.6%. As a percentage of sales, gross profit increased to 28.8% in fiscal year 2009 from 27.5% in fiscal year 2008. Principal components of the increase in gross margin dollars in fiscal year 2009 are a $2.3 million increase from improved gross margin percentage, a $1.1 million increase from higher comparable store sales, offset by a $0.6 million decrease in gross profit from net store closings. Total markdown costs decreased to $26.0 million in fiscal year 2009 compared to $26.7 million in fiscal year 2008, reflecting the stronger regular price sales across all categories of footwear in fiscal year 2009 and lower inventory levels in 2009.

 

Selling expense.  Selling expense decreased to $40.8 million in fiscal year 2009 from $42.2 million in fiscal year 2008, a decrease of $1.3 million or 3.2%. The decrease was primarily the result of a $0.8 million decrease in store depreciation expense and a $0.5 million decrease in direct marketing costs.

 

General and administrative expense.  General and administrative expense decreased to $15.9 million in fiscal year 2009 from $17.2 million in fiscal year 2008, a decrease of $1.3 million or 7.5%. As a percentage of sales, general and administrative expense decreased to 8.6% from 9.4% in fiscal year 2008. The decrease was primarily the result of $0.8 million of lower group health insurance costs, $0.4 million of lower depreciation and a net $0.1 million decrease of professional fees, repairs and maintenance costs.

 

Gain/loss on disposal of property and equipment.  Loss on disposal of property and equipment was $0.3 million in fiscal year 2009 and fiscal year 2008. The loss in fiscal year 2009 relates to expensing leasehold improvements and store fixtures due to store closings.

 

Impairment of long-lived assets.  During fiscal year 2009 we recognized $2.8 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. Impairment expense in fiscal year 2008 was $2.6 million.

 

Interest expense.  Interest expense decreased to $2.7 million in fiscal year 2009 from $3.3 million in fiscal year 2008, a decrease of $0.6 million. The decrease in interest expense reflects a decreased average outstanding balance on the revolving credit agreement. There was also an additional $250,000 fee incurred in fiscal year 2008, due to the modification of the subordinated secured term loan, which was not incurred in fiscal year 2009.

 

Income tax expense.  We did not recognized an income tax expense in fiscal year 2009 compared to income tax expense of $0.1 million in fiscal year 2008. The income tax expense in fiscal year 2008 reflects differences between the alternative minimum tax and realized operating loss carrybacks recognized in the income tax provision and the income tax returns filed for fiscal year 2007.

 

Net loss.  We had a net loss of $9.1 million in fiscal year 2009 compared to net loss of $15.0 million in fiscal year 2008.

 

Fiscal Year Ended January 31, 2009 Compared to Fiscal Year Ended February 2, 2008

 

Net sales.  Net sales were $183.7 million in fiscal year 2008, down from $186.3 million for fiscal year 2007, a decrease of $2.6 million or 1.4%. Comparable store sales in fiscal year 2008 increased 0.5% compared to a 12.3% decrease in fiscal year 2007. Sales reflected weak customer response to early spring offerings, strong sandal sales during the summer months, favorable sales trends across all key categories, particularly in boots and dress shoes during the fall, which slowed considerably from mid-December through year-end as economic conditions negatively affected sales throughout the retail sector. Average unit selling prices increased 11.7% reflecting

higher price points and stronger regular price sales compared to fiscal year 2007. Unit sales volume decreased 11.7%. Our Internet and catalog sales increased 2.1% to $9.8 million in fiscal year 2008.

 

Gross profit.  Gross profit increased to $50.6 million in fiscal year 2008 from $47.5 million in fiscal year 2007, an increase of $3.1 million or 6.5%. As a percentage of sales, gross profit increased to 27.5% in fiscal year 2008 from 25.5% in fiscal year 2007. Principal components of the increase in gross margin dollars in fiscal year 2008 are a $3.7 million increase from improved gross margin percentage, a $0.4 million increase from higher comparable store sales, offset by a $1.0 million decrease in gross profit from net store closings. Permanent markdown costs were $11.4 million in fiscal year 2008 compared to $15.8 million in fiscal year 2007, reflecting the stronger regular price sales across all categories of footwear in fiscal year 2008 and the impact of the significant pricing actions taken during fiscal year 2007

 

Selling expense.  Selling expense decreased to $42.2 million in fiscal year 2008 from $46.5 million in fiscal year 2007, a decrease of $4.3 million or 9.2%. The decrease was primarily the result of a $1.8 million decrease in direct marketing costs, a $1.2 million decrease in store payroll expenses, a $0.6 million decrease in store depreciation expense, a $0.4 million decrease in store supplies and repairs, and a $0.3 million decrease in other marketing expenses.

 

General and administrative expense.  General and administrative expense decreased to $17.2 million in fiscal year 2008 from $17.9 million in fiscal year 2007, a decrease of $0.7 million or 3.9%. As a percentage of sales, general and administrative expense decreased to 9.4% from 9.6% in fiscal year 2007. The decrease was primarily the result of $0.5 million of lower payroll costs, and $0.2 million of lower depreciation.

 

Gain/loss on disposal of property and equipment.  Loss on disposal of property and equipment was $0.3 million in fiscal year 2008 compared to a gain of $4.7 million in fiscal year 2007. The loss in fiscal year 2008 relates to expensing leasehold improvements and store fixtures due to store closings. The gain in fiscal year 2007 relates to the termination of a long-term below-market operating lease in December 2007.

 

Impairment of long-lived assets.  During fiscal year 2008 we recognized $2.6 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. Impairment expense in fiscal year 2007 was $3.1 million.

 

Interest expense.  Interest expense increased to $3.3 million in fiscal year 2008 from $1.7 million in fiscal year 2007, an increase of $1.6 million. The increase in interest expense reflects the interest on our subordinated secured term loan entered into in February 2008 and our subordinated convertible debentures issued in June 2007. The increase was slightly offset by the decrease in average borrowings and average interest rate under our revolving credit facility compared to the prior year.

 

Income tax expense.  We recognized $0.1 million in income tax expense compared to income tax expense of $0.7 million in fiscal year 2007. The income tax expense in fiscal year 2008 reflects differences between the alternative minimum tax and realized operating loss carrybacks recognized in the income tax provision and the income tax returns filed for fiscal year 2007. The income tax expense for fiscal year 2007 reflects the establishment of a full valuation allowance against the net deferred tax assets.

 

Net loss.  We had a net loss of $15.0 million in fiscal year 2008 compared to net loss of $17.7 million in fiscal year 2007.

Seasonality and Quarterly Fluctuations

 

The following table sets forth our summary operating results for the quarterly periods indicated.

 

 

 

 

 

 

Our operating results are subject to significant seasonal variations. Our quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of these seasonal variances, in particular our principal selling seasons. We have five principal selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Quarterly comparisons may also be affected by the timing of sales promotions and costs associated with remodeling stores, opening new stores or acquiring stores. Sales and operating results in our third quarter are typically much weaker than in our other quarters.

 

Liquidity and Capital Resources

 

Our cash requirements are primarily for working capital, capital expenditures and principal and interest payments on our debt obligations. Historically, these cash needs have been met by cash flows from operations, borrowings under our revolving credit facility and sales of securities. As discussed below in “Financing Activities” the balance on our revolving credit facility fluctuates throughout the year as a result of our seasonal working capital requirements and our other uses of cash.

We incurred net losses of $9.1 million and $15.0 million in fiscal years 2009 and 2008, but made significant progress during 2009 and 2008 in refocusing our inventory lines and maintaining cost control. We achieved increases in comparable store sales of 1.3% and 0.5% in fiscal years 2009 and 2008, respectively. In fiscal year 2009 we increased gross margin by 127 basis points and reduced selling, general and administrative expenses by 171 basis points as a percentage of sales on top of a 200 basis point increase in gross margin and a 200 basis point reduction in selling, general and administrative expenses achieved in fiscal year 2008. These improvements were made despite being negatively impacted by the sharp economic slowdown beginning in fall 2008.

 

Our losses in the last three years have had a significant negative impact on our financial position and liquidity. As of January 30, 2010, we had negative working capital of $14.3 million, unused borrowing capacity under our revolving credit facility of $1.9 million, and our shareholders’ equity had declined to $2.1 million.

 

Our business plan for fiscal year 2010 is based on mid-single digit increases in comparable store sales for the remainder of the year, although comparable store sales through April 24, 2010 are down 1.4%. Based on our business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2010. The business plan reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2009. The plan also includes continued control over selling, general and administrative expenses. We continue to work with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2010 reflects continued improvement in cash flow, but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in our business plan.

 

In fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan due February 1, 2011. As of April 24, 2010, the balance on our term loan was $2.2 million, with monthly principal and interest payments due through February 1, 2011. Originally, the term loan agreement contained financial covenants requiring us to maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) measured each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009 and March 2010) to modify these covenants in order to remain in compliance. The March 2010 amendment completely eliminated these covenants for the remainder of the term loan. As consideration for the initial loan and the May 2008 amendment thereto, we issued 400,000 shares of our common stock and paid an advisory fee of $300,000 and costs and expenses. As consideration for the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an additional 250,000 shares of our common stock. We did not pay any fees in connection with the March 2010 amendment.

 

In order to obtain our senior lender’s consent to the April 2009 and September 2009 amendments to our subordinated secured term loan, we amended our credit facility in those months. Among other things, the amendments extended the maturity from August 31, 2010 to January 31, 2011, reduced the credit ceiling from $40 million to $30 million, generally increased the interest rate from the bank’s prime rate to the prime rate plus 3.5%, eliminated a grace period for failing to maintain a minimum availability and implemented other amendments to the agreement, including increasing certain fees. As additional consideration for the amendments and the extension of the maturity date of the facility, we paid a total of $155,000 in fees. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of April 24, 2010, the balance on our revolving line of credit was $14.3 million and our unused borrowing capacity was $2.0 million.

 

Our business plan is premised on our ability to renew or replace our existing credit facility which is scheduled to expire on January 31, 2011 at terms comparable to the existing terms. Although we believe that we will be successful in this effort, there is no assurance that we will be able to do so. If we are unable to extend our credit facility, it would become necessary for us to obtain additional sources of liquidity to continue to operate. Please see “Item 1. Business — Risk Factors — Our revolving credit facility is scheduled to expire on January 31, 2011 and our continued operations are reliant upon our ability to either renew or replace this facility” herein.

 

We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. In recognition of existing liquidity constraints, we continue to look for additional sources of

capital at acceptable terms. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See “Item 1. Business — Risk Factors — “If we cannot maintain generally positive sales trends, we could fail to maintain a liquidity position adequate to support our ongoing operations.” herein.

 

For additional information on our loan arrangements, please see “Item 1. Business — Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 1. Business — Risk Factors — Our credit facility restricts our activities” herein.

 

As a result of our reduced shareholders’ equity, in September 2009 we transferred the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market, the lowest tier of The Nasdaq Stock Market (“Nasdaq”). On March 29, 2009, Nasdaq issued a determination to delist our common stock as a result of our failing to meet the $2.5 million minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. We are currently in the process of appealing Nasdaq’s determination, which has temporarily stayed our delisting from Nasdaq. However, we believe that it is likely that our operating results will not allow us to regain compliance with the Nasdaq minimum stockholders’ equity requirement during fiscal year 2010. Therefore, we can give no assurance that our appeal will be successful. Delisting could limit our ability to raise capital from the sale of securities. Please see “Item 1. Business — Risk Factors — The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq could negatively impact the value of our common stock and decrease the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock.”

 

Our independent registered public accounting firm’s report issued in this Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern, including our recent losses and working capital deficiency. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2009 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” herein.

 

The following table summarizes certain key liquidity measurements as of the dates indicated:

 

 

 

 

Operating activities

 

As a result of the seasonality of our operations, we generate a significant proportion of our cash from operating activities during our fourth quarter. For fiscal year 2009 through the end of our third quarter, cash used in operating activities was $3.0 million compared to cash provided by operating activities of $3.9 million for the entire fiscal year. For fiscal year 2008 through the end of the third quarter, cash used in operating activities was $13.7 million compared to cash used by operating activities of $4.0 million for the entire fiscal year.

 

Cash provided by operating activities increased significantly to $3.9 million in fiscal year 2009 compared to cash used in operating activities of $4.0 million in fiscal year 2008 as a result of the reduction in our net loss and working capital management. The net loss in fiscal year 2009 of $9.1 million included significant non-cash items such as depreciation expense of $6.5 million, impairment expense of $2.8 million, and stock-based compensation expense of $0.6 million. There was a $0.7 million decrease in inventory and a $1.4 million increase of accounts payable, accrued expenses and accrued rent liabilities from the balances at the end of fiscal year 2008.

 

Our inventories at January 30, 2010 decreased to $20.2 million from $21.0 million at January 31, 2009. We believe that at January 30, 2010, inventory levels and valuations are appropriate given current and anticipated sales trends, however, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

 

For fiscal year 2008, cash used in operating activities was $4.0 million compared to cash used in operating activities of $2.0 million in fiscal year 2007. The net loss in fiscal year 2008 of $15.0 million included significant non-cash items such as depreciation expense of $7.8 million, impairment expense of $2.6 million, and stock-based compensation expense of $0.6 million. There was a $2.9 million increase in inventory, a net reduction in prepaid income tax assets of $1.9 million, and a $0.5 million reduction of accounts payable, accrued expenses and accrued rent liabilities from the balances at the end of fiscal year 2007.

 

We are committed under noncancelable operating leases for all store and office spaces. These leases expire at various dates through 2020 and generally provide for minimum rent plus payments for real estate taxes and operating expenses, subject to escalations. Some of our leases also require us to pay contingent rent based on sales. As of January 30, 2010, our lease payment obligations under these leases totaled approximately $24.8 million for fiscal year 2010, and an aggregate of approximately $134.3 million through 2020.

 

Our ability to meet our current and anticipated operating requirements will depend on our future performance, which, in turn, will be subject to general economic conditions and financial, business and other factors, including factors beyond our control.

 

Investing activities

 

In fiscal year 2009, cash used in investing activities was $0.4 million compared to cash used in investing activities of $0.9 million in fiscal year 2008 and cash provided by investing activities of $0.3 million in fiscal year 2007. During each year, cash used in investing activities consisted primarily of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

 

On December 11, 2007, we entered into an agreement to terminate a long-term below market operating lease in exchange for a $5.0 million cash payment received on December 11, 2007 and the right to continue occupying the space through January 8, 2009. We used the net proceeds of approximately $5.0 million to reduce the balance on our revolving line of credit. We do not believe that we have any other operating leases that could be terminated on substantially similar terms.

 

We currently anticipate that our capital expenditures in fiscal year 2010, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $1.0 million. We anticipate being able to fund this level of store expansion from internally generated cash flow.

 

Our future capital expenditures will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We continuously evaluate our future capital

expenditure plans and adjust planned expenditures, as necessary, based on business conditions. As of April 24, 2010, we have opened two new stores in fiscal year 2010.

 

Financing activities

 

In fiscal year 2009, net cash used in financing activities was $3.5 million compared to net cash provided by financing activities of $4.9 million in fiscal year 2008 and $1.5 million in fiscal year 2007. The principal uses of cash in financing activities in fiscal year 2009 was the repayment of $2.5 million on the subordinated secured term loan and net repayments on our revolving line of credit of approximately $1.0 million. The principal source of cash from financing activities in fiscal year 2008 was the net proceeds of approximately $6.7 million from the entry into the subordinated term loan and related issuance of 350,000 shares of common stock and net draws of $0.3 million on our revolving line of credit. The principal source of cash from financing activities in fiscal year 2007 was the net proceeds of approximately $3.6 million from the placement of our subordinated convertible debentures.

 

Revolving Credit Facility

 

We have a $30 million senior secured revolving credit facility with Bank of America, N.A which expires at the end of fiscal year 2010. We had balances under our credit facility of $10.5 million, and $11.5 million as of January 30, 2010 and January 31, 2009, respectively. We had approximately $1.9 million and $0.7 million in unused borrowing capacity calculated under the provisions of our credit facility as of January 20, 2010 and January 31, 2009, respectively. During fiscal years 2009 and 2008, the highest outstanding balances on our credit facility were $21.0 million and $22.9 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures. As of April 23, 2010, we had an outstanding balance on its revolving credit facility of $14.3 million and unused borrowing capacity of $2.0 million.

 

In order to obtain the bank’s consent to the April 2009 and September 2009 amendments to our subordinated secured term loan, we amended our credit facility in those months. Among other things, the amendments extended the maturity from August 31, 2010 to January 31, 2011, reduced the credit ceiling from $40 million to $30 million, generally increased the interest rate from the bank’s base rate to the base rate plus 3.5%, eliminated a grace period for failing to maintain a minimum availability and implemented other amendments to the agreement, including increasing certain fees. Amounts borrowed under the facility bear interest at a rate equal to the base rate (as defined in the agreement) plus a margin amount. Under the amendment, the base rate was revised so that it equals the greater of the bank’s prime rate, the federal funds rate plus 0.50% or the Libor rate plus 1.0% (all as defined in the agreement).

 

The revolving credit facility also allows us to apply an interest rate based on Libor (as defined in the agreement) plus a margin amount to a designated portion of the outstanding balance as set forth in the agreement. Under the April and September 2009 amendments, the Libor margin (as defined in the agreement) was increased from a range of 1.75%-2.25% to a range of 3.5%-4.0%. Following the occurrence of any event of default, the Bank may increase the rate by an additional two percentage points.

 

The amendments also increased our unused line fee from 0.25% per annum to 0.75% per annum. The unused line fee is payable monthly based on the difference between the revolving credit ceiling and the average loan balance under the agreement. The aggregate amount that we may borrow under the agreement at any time is further limited by a formula, which is based substantially on our inventory level but cannot be greater than the revolving credit ceiling of $30 million. The amendments reduced our borrowing base (as defined in the credit facility) for the periods from October 1 to December 15 of each year and decreases the amount of permitted acquisitions (as defined in the agreement) per year from $2,000,000 to $250,000. As additional consideration for the amendments and the extension of the maturity date of the facility, we paid a total of $155,000 in fees.

 

Amounts borrowed under the credit facility continue to be secured by substantially all of our assets. In connection with the administration of the agreement, we are required to pay a facility fee of $2,000 per month. If contingencies related to early termination of the revolving credit facility were to occur, or if we request and receive an accommodation from the lender in connection with the facility, we may be required to pay additional fees.

The credit facility continues to include financial, reporting and other covenants relating to, among other things, use of funds under the facility in accordance with our business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of our common stock or our combined voting power (as defined in the credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock, and restricting certain acquisitions. In the event that we violate any of these covenants, or if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as a result of certain sales of our common stock), the lender would have the right to accelerate repayment of all amounts outstanding under the agreement, or to commence foreclosure proceedings on our assets. We were in compliance with these covenants as of January 30, 2010 and expect to remain in compliance throughout fiscal year 2010 based on the expected execution of our business plan.

 

Subordinated Secured Term Loan

 

We have a subordinated secured term loan with Private Equity Management Group, Inc. (PEM) as arranger and administrative agent on behalf of the lender, and an affiliate of PEM, as the lender, pursuant to a Second Lien Credit Agreement dated February 4, 2008. The loan matures on February 1, 2011. We had balances under the loan of $2.8 million and $4.8 million as of January 30, 2010 and January 31, 2009, with 36 monthly installments of principal and interest at an interest rate of 15% per annum. The loan is secured by substantially all of our assets. The loan is subordinate to our senior secured credit facility with Bank of America, N.A., our senior lender, but it is senior to our $4 million in aggregate principal amount of subordinated convertible debentures due 2012.

 

Originally, the loan agreement contained financial covenants requiring us to maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009 and March 2010) to modify these covenants in order to remain in compliance. The March 2010 amendment completely eliminated these covenants for the remainder of the term loan. As consideration for the initial loan and the May 2008 amendment thereto, PEM received 400,000 shares of our common stock, an advisory fee of $300,000 and PEM’s costs and expenses. As consideration for the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an additional 250,000 shares of our common stock. We did not pay any fees in connection with the March 2010 amendment.

 

We entered into the loan in February 2008. At that time, we received aggregate gross proceeds of $7.5 million and net proceeds of approximately $6.7 million from the term loan. We used the net proceeds initially to repay amounts owed under our senior credit facility and for working capital purposes. We also have broad obligations to indemnify, and pay the fees and expenses of PEM and the Lender in connection with, among other things, the enforcement, performance and administration of the loan agreement and the other loan documents.

 

Under the loan agreement, we continue to be permitted to prepay the Loan, subject to a prepayment penalty which is now 1% of the aggregate principal balance of the Loan. We are also required to make prepayments, subject to our senior subordination agreement with PEM and our senior lender, on the term loan in certain circumstances, including generally if we sell property and assets outside the ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.

 

The loan agreement still contains a financial covenant which sets an annual limit of $1 million for capital expenditures. The loan agreement also contains certain other restrictive covenants, including covenants that restrict our ability to incur additional indebtedness, to pre-pay other indebtedness, to dispose of assets, to effect certain corporate transactions, including specified mergers and sales of all or substantially all of our assets, to change the nature of our business, to pay dividends (other than in the form of common stock dividends), as well as covenants that limit transactions with affiliates and prohibit a change of control. For this purpose, a change of control is generally defined as, among other things, a person or entity acquiring beneficial ownership of more than 50% of our common stock, specified changes to our Board of Directors, sale of all or substantially all of our assets or certain recapitalizations. The loan agreement also contains customary representations and warranties and affirmative covenants, including provisions relating to providing reports, inspections and appraisal, and maintenance of property and collateral.

Upon the occurrence of an event of default under the loan agreement, the Lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the senior subordination agreement, with the interest rate increasing to 17.5% per annum. The loan agreement generally provides for customary events of default, including default in the payment of principal or interest or other required payments, failure to observe or perform covenants or agreements contained in the transaction documents (excluding the registration rights agreement), materially breaching our credit facility with our senior lender or the terms of our subordinated convertible debentures, generally failure to pay when due debt obligations (broadly defined, subject to certain exceptions) in excess of $1 million, specified events of bankruptcy or specified judgments against us.

 

We have granted certain registration rights to PEM with respect to the initial 400,000 shares described above, including the potential payments of liquidated damages in certain circumstances in relating to the timing and effectiveness of the registration statement. As required, we filed the registration statement at our expense and the SEC declared the registration statement effective within the required time periods, and our potential liability for liquidated damages ended on February 1, 2010. We also have certain other ongoing obligations, including providing PEM specified notices and certain information, indemnifying PEM for certain liabilities and using reasonable best efforts to timely file all required filings with the SEC and make and keep current public information about us. We did not grant PEM any registration rights with respect to the 250,000 additional shares issued in connection with the April 2009 amendment to the term loan.

 

Subordinated Convertible Debentures

 

On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated convertible debentures (the “Debentures”) to seven accredited investors in a private placement generating net proceeds of approximately $3.6 million, which were used to repay amounts owed under our revolving credit facility. The Debentures are nonamortizing, bear interest at a rate of 9.5% per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012. Investors included corporate directors Andrew N. Baur and Scott C. Schnuck, an entity affiliated with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.

 

The Debentures are convertible into shares of common stock at any time. The initial conversion price was $9.00 per share. The conversion price, and thus the number of shares into which the Debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each holder is entitled to receive a like amount of such distributed property. In the event of a merger, consolidation, sale of substantially all of our assets, or reclassification or compulsory share exchange, then upon any subsequent conversion each holder will have the right to either the same property as it would have otherwise been entitled or cash in an amount equal to 100% principal amount of the Debenture, plus interest and any other amounts owed. The Debentures also contain a weighted average conversion price adjustment generally for future issuances, at prices less than the then current conversion price, of common stock or securities convertible into, or options to purchase, shares of common stock, excluding generally currently outstanding options, warrants or performance shares and any future issuances or deemed issuances pursuant to any properly authorized equity compensation plans. In accordance with rules of the Nasdaq, the Debentures contain limitations on the number of shares issuable pursuant to the Debentures regardless of how low the conversion price may be, including limitations generally requiring that the conversion price not be less than $8.10 per share for Debentures issued to advisory directors, corporate directors or the entity affiliated with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the transaction or such that following conversion, the total number of shares beneficially owned by each holder does not exceed 19.999% of our common stock. These limitations may be removed with shareholder approval.

 

As a result of the issuance of 650,000 shares of common stock in connection with our subordinated secured term loan, the conversion price of the Debentures decreased from $9.00 to $8.31, making the Debentures convertible into 481,347 shares of our common stock.

 

The Debentures generally provide for customary events of default, which could result in acceleration of all amounts owed, including default in required payments, failure to pay when due, or the acceleration of, other monetary obligations for indebtedness (broadly defined) in excess of $1 million (subject to certain exceptions), failure to observe or perform covenants or agreements contained in the transaction documents, including covenants

relating to using the net proceeds, maintaining legal existence, prohibiting the sale of material assets outside of the ordinary course, prohibiting cash dividends and distributions, share repurchases, and certain payments to our officers and directors. We generally have the right, but not the obligation, to redeem the unpaid principal balance of the Debentures at any time prior to conversion if the closing price of our common stock (as adjusted for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each of 20 consecutive trading days and certain other conditions are met. We have also agreed to provide certain piggyback and demand registration rights, until two years after the Debentures cease to be outstanding, to the holders under the Securities Act of 1933 relating to the shares of common stock issuable upon conversion of the Debentures. In April 2010, the debenture documents were amended to remove our de-listing from the Nasdaq Stock Market as an event of default. Please see “Item 1. Business — Risk Factors — The Nasdaq Stock Market has made a determination to delist our common stock and there is no assurance that our appeal of that determination will be successful. Delisting from Nasdaq would be likely to increase volatility and to decrease the liquidity of our common stock.”

 

2005 Private Placement of Common Stock and Warrants

 

In connection with our 2005 private placement of common stock and warrants, we issued warrants to purchase a total of 375,000 shares of common stock, subject to anti-dilution and other adjustments. The warrants had an exercise price of $10.18 per share and contained cashless exercise and call provisions. Through January 30, 2010, warrants underlying 112,500 shares of common stock had been exercised, generating net proceeds to us of $1,145,250. On April 8, 2010, the remaining 262,500 warrants expired.

 

IPO Warrants

 

In connection with our 2004 initial public offering, we sold to the representatives of the underwriters and their designees five year warrants to purchase up to an aggregate of 216,000 shares of common stock at an exercise price equal to $12.7875 per share. Through January 31, 2009, warrants underlying 94,500 shares of common stock were tendered in cashless exercise transactions under which we issued 35,762 shares of common stock. On February 10, 2009, all unexercised warrants expired. Demand and piggyback registration rights ended on February 10, 2009 and February 10, 2010, respectively.

 

Contractual Obligations

 

The following table summarizes our contractual obligations as of January 30, 2010:

 

 

 

 

Off-Balance Sheet Arrangements

 

At January 30, 2010 and January 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or

other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in such relationships.

 

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Codification (ASC) 105 Generally Accepted Accounting Principles, or the Codification. The Codification is the sole source of authoritative U.S. accounting and reporting standards recognized by the FASB. Rules and interpretive releases of the SEC are also sources of authoritative GAAP. The Company adopted ASC 105 during the quarter ended October 31, 2009. Upon adoption of ASC 105, references within financial statement disclosures were modified to reference the Codification.

 

In May 2009, the FASB issued an update to the Subsequent Events topic (ASC 855), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. ASC 855 was effective beginning in the second quarter of 2009 for the Company and did not have a material impact on its financial position, results of operations, or cash flows.

 

Effective starting with the second quarter of fiscal 2009, we adopted the provisions of ASC 825 Financial Instruments related to interim disclosures about fair value of financial instruments. This guidance requires disclosures regarding fair value of financial instruments in interim financial statements, as well as in annual financial statements. The adoption had no impact on our financial statements other than additional disclosures.

 

Impact of Inflation

 

Overall, we do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot give assurance, however, that our business will not be affected by inflation in the future.

 

 

Not Required.

 

 

Our financial statements together with the report of the independent registered public accounting firm are set forth beginning on page F-1 and are incorporated herein by this reference.

 

 

None.

 

 

Disclosure Controls and Procedures.  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in accumulating and communicating such information to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting.  The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of January 30, 2010.

 

Our internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting.  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fourth fiscal quarter ended January 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the Company’s fourth quarter of fiscal year 2009.

 

 

None.

 

 

Information set forth in the Company’s 2010 Proxy Statement under the caption “Information Regarding Board of Directors and Committees” is hereby incorporated by reference. No other sections of the 2010 Proxy Statement are incorporated herein by this reference. The following information with respect to the executive officers of the Company as of April 1, 2010 is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.

 

Executive Officers of the Registrant

 

Certain information concerning the executive officers of Bakers is set forth below:

 

Peter A. Edison has over 30 years of experience in the fashion and apparel industry. Between 1986 and 1997, Mr. Edison served as director and as an officer in various divisions of Edison Brothers Stores, Inc., including serving as the Director of Corporate Development for Edison Brothers, President of Edison Big & Tall, and as President of Chandlers/Sacha of London. He also served as Director of Marketing and Merchandise Controller, and in other capacities, for Edison Shoe Division. Mr. Edison received his M.B.A. in 1981 from Harvard Business School, and served as chairman of the board of directors of Dave & Busters, Inc. until February 2006. He has served as our Chairman of the Board and Chief Executive Officer since October 1997 and as our President since September 15, 2007.

 

Mark D. Ianni has over 25 combined years with Edison Brothers and Bakers as an experienced first-cost buyer, having held various positions, including Merchandiser, Associate Buyer, Senior Dress Shoe Buyer, Tailored Shoe Buyer and Executive Vice President — Divisional Merchandise Manager of Dress Shoes from June 1999 to July 2002. Mr. Ianni has served as our Executive Vice President since July 2002 and our Chief Merchandising Officer since September 15, 2007.

 

Stanley K. Tusman has over 30 years of financial analysis and business experience. Mr. Tusman served as the Vice President — Director of Planning & Allocation for the 500-store Edison Footwear Group, the Vice President of Retail Systems Integration for the 500-store Genesco Retail, Director of Merchandising, Planning and Logistics for the 180-store Journey’s and the Executive Director of Financial Planning for the 400-store Claire’s Boutiques chains. Mr. Tusman has served as our Executive Vice President since June 1999 and our Chief Planning Officer since September 15, 2007.

 

Joseph R. VanderPluym is a 30-year veteran of store operations with a track record of building and motivating high energy, high service field organizations. Mr. VanderPluym spent 20 years at the 700-store Merry Go Round chain, where he served as Executive Vice President of Stores for Merry Go Round and Boogie’s Diner Stores. He served as Vice President of Stores for Edison Footwear Group for two years and as Vice President of Stores for Lucky Brand Apparel Stores for approximately six months prior to joining Bakers. Mr. VanderPluym has served as either our Vice President — Stores or our Executive Vice President since June 1999 and as Chief Operations Officer since September 15, 2007.

 

Charles R. Daniel, III has over 25 years of accounting experience. Mr. Daniel has served as our Controller since February 2004. Prior to that time, Mr. Daniel worked for the accounting firm of Stone Carlie & Company. Mr. Daniel served as our Secretary, Treasurer and Vice President — Finance since February 4, 2008 and has served as Executive Vice President and Chief Financial Officer since March 12, 2009.

 

Each of the executive officers, except for Mr. Daniel, has entered into an employment agreement with the Company. Information with respect to the executive officers set forth in the Company’s 2010 Proxy Statement under the caption “Executive Compensation — Employment Agreements and Termination of Employment” is incorporated herein by this reference.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in the Company’s 2010 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by this reference. No other sections of the 2010 Proxy Statement are incorporated by this reference.

 

Code of Ethics

 

The Company has adopted a Code of Business Conduct (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as directors, officers and employees of the Company. The Code of Ethics has been filed as Exhibit 14.1 to this Annual Report on Form 10-K. The information set forth under the caption “Information Regarding Board of Directors and Committees — Code of Business Conduct” in the Company’s 2010 Proxy Statement is incorporated herein by this reference. No other sections of the 2010 Proxy Statement are incorporated by this reference.

 

The information set forth in the Company’s 2010 Proxy Statement under the captions “Information Regarding Board of Directors and Committees — Compensation of Directors,” “Information Regarding Board of Directors and Committees — Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” are hereby incorporated by reference. No other sections of the 2010 Proxy Statement are incorporated herein by this reference.

 

 

The information set forth in the Company’s 2010 Proxy Statement under the caption “Stock Ownership of Management and Certain Beneficial Owners” is hereby incorporated by reference. The information set forth under the caption “Equity Compensation Plan Information” in the Company’s 2010 Proxy Statement is hereby incorporated herein by reference. No other sections of the 2010 Proxy Statement are incorporated herein by this reference.

 

 

The information set forth under the caption “Certain Relationships and Related Person Transactions” and “Information Regarding Board of Directors and Committees — Corporate Governance and Director Independence” in the Company’s 2010 Proxy Statement is hereby incorporated by reference. No other sections of the 2010 Proxy Statement are incorporated herein by this reference.

 

 

The section of the 2010 Proxy Statement entitled “Principal Accountant Fees and Services” is hereby incorporated by reference.

 

No other sections of the 2010 Proxy Statement are incorporated herein by this reference.

 

 

(a) Documents filed as part of this Report:

 

1. Financial Statements:  The financial statements commence on page F-1. The Index to Financial Statements on page F-1 is incorporated herein by reference.

 

2. Financial Statement Schedules:  All information schedules have been omitted as the required information is inapplicable, not required, or other information is included in the financial statement notes.

 

3. Exhibits:  The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference. The following exhibits are management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K: Exhibits 10.1 through 10.23. The exhibits were filed with the SEC but were not included in the printed version of the Annual Report to Shareholders.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BAKERS FOOTWEAR GROUP, INC.

 

Peter A. Edison

Chairman of the Board, Chief Executive Officer

and President (Principal Executive Officer)

 

April 30, 2010

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

Peter A. Edison

Attorney-in-Fact

EXHIBIT INDEX

 

 

 

INDEX TO FINANCIAL STATEMENTS

 

Contents

 

 

The Board of Directors and Shareholders

Bakers Footwear Group, Inc.

 

We have audited the accompanying balance sheets of Bakers Footwear Group, Inc. (the Company) as of January 30, 2010 and January 31, 2009, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bakers Footwear Group, Inc. at January 30, 2010 and January 31, 2009, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2010, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has incurred substantial losses from operations in recent years and has a significant working capital deficiency. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

/s/ ERNST & YOUNG LLP

 

St. Louis, Missouri

April 30, 2010

BAKERS FOOTWEAR GROUP, INC.

BALANCE SHEETS

 

 

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF OPERATIONS

 

 

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

 

 

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF CASH FLOWS